SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1994 Commission File Number 0-5108
STATE STREET BOSTON CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Massachusetts 04-2456637
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (6l7) 786-3000.
Indicate by check mark whether the registrant (l) 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 last 90 days.
YES X NO
Number of shares of registrant's common stock outstanding on July 31, 1994 was
76,452,618.
STATE STREET BOSTON CORPORATION
Table of Contents
Page
Part I. Financial Information
Part I. Item 1. Financial Statements
Consolidated Statements of Income 1-2
Consolidated Statement of Condition 3
Consolidated Statement of Cash Flows 4
Consolidated Statement of Changes in Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-10
Independent Accountants' Review Report 11
Part I. Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-21
Part II. Other Information 22
Signatures 23
Exhibit 24
Part I. Item 1. Financial Statements
STATE STREET BOSTON CORPORATION
Consolidated Statement of Income
Three Months ended June 30,
(Dollars in thousands, except per share data)
(Unaudited)
1994 1993
Interest Revenue
Deposits with banks $ 46,429 $ 52,242
Investment securities:
U.S. Treasury and Federal agencies 35,001 28,787
State and political subdivisions 9,978 5,410
Other investments 30,857 23,455
Loans 46,019 29,900
Federal funds sold and securities
purchased under resale agreements 28,100 29,326
Trading account assets 5,693 2,711
Total interest revenue 202,077 171,831
Interest Expense
Deposits 61,273 51,589
Other borrowings 47,076 42,419
Long-term debt 2,158 2,328
Total interest expense 110,507 96,336
Net interest revenue 91,570 75,495
Provision for loan losses 3,182 2,880
Net interest revenue after
provision for loan losses 88,388 72,615
Fee Revenue
Fiduciary compensation 175,608 151,655
Other 65,001 53,651
Total fee revenue 240,609 205,306
Revenue Before Operating Expenses 328,997 277,921
Operating Expenses
Salaries and employee benefits 139,164 115,676
Occupancy, net 17,739 14,989
Equipment 27,807 25,626
Other 65,764 55,318
Total operating expenses 250,474 211,609
Income before income taxes 78,523 66,312
Income taxes 27,482 23,095
Net Income $ 51,041 $ 43,217
Earnings Per Share
Primary $ .66 $ .57
Fully diluted .66 .56
Average Shares Outstanding (in thousands)
Primary 76,882 76,046
Fully diluted 77,540 77,120
Cash dividends declared per share $ .15 $ .13
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
Consolidated Statement of Income
Six months ended June 30,
(Dollars in thousands, except per share data)
(Unaudited)
1994 1993
Interest Revenue
Deposits with banks $ 97,739 $ 103,301
Investment securities:
U.S. Treasury and Federal agencies 67,450 58,429
State and political subdivisions 19,295 10,386
Other investments 59,796 47,704
Loans 83,636 58,470
Federal funds sold and securities
purchased under resale agreements 56,928 51,916
Trading account assets 9,225 5,010
Total interest revenue 394,069 335,216
Interest Expense
Deposits 116,402 101,242
Other borrowings 93,039 77,236
Long-term debt 4,328 4,995
Total interest expense 213,769 183,473
Net interest revenue 180,300 151,743
Provision for loan losses 6,352 5,560
Net interest revenue after
provision for loan losses 173,948 146,183
Fee Revenue
Fiduciary compensation 355,675 296,100
Other 133,654 103,213
Total fee revenue 489,329 399,313
Revenue Before Operating Expenses 663,277 545,496
Operating Expenses
Salaries and employee benefits 278,516 227,053
Occupancy, net 34,262 30,174
Equipment 55,858 49,226
Other 134,928 108,275
Total operating expenses 503,564 414,728
Income before income taxes 159,713 130,768
Income taxes 57,382 44,896
Net Income $ 102,331 $ 85,872
Earnings Per Share
Primary $1.33 $1.13
Fully diluted 1.32 1.11
Average Shares Outstanding (in thousands)
Primary 76,772 76,121
Fully diluted 77,460 77,209
Cash dividends declared per share $ .29 $ .25
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
Consolidated Statement of Condition
(Dollars in thousands)
(Unaudited)
June 30, December 31
1994 1993
Assets
Cash and due from banks $ 1,496,057 $ 1,469,395
Interest-bearing deposits with banks 4,581,060 5,148,249
Securities purchased under resale agreements 2,228,756 2,267,546
Federal funds sold 1,478,968 188,000
Trading account assets 700,243 159,446
Investment securities:
Held to maturity 4,573,371 4,484,104
Available for sale 1,604,675 1,217,095
Total investment securities 6,178,046 5,701,199
Loans 3,261,124 2,680,174
Allowance for loan losses (55,947) (54,316)
Net loans 3,205,177 2,625,858
Premises and equipment 463,147 445,109
Customers' acceptance liability 19,514 65,643
Accrued income receivable 338,010 280,976
Other assets 1,088,673 368,702
Total Assets $ 21,777,651 $18,720,123
Liabilities
Deposits:
Noninterest-bearing deposits $ 5,371,222 $ 5,450,183
Interest-bearing deposits:
Domestic 1,871,216 2,140,457
Foreign 7,483,974 5,427,231
Total deposits 14,726,412 13,017,871
Federal funds purchased 105,445 269,083
Securities sold under repurchase agreements 3,670,693 2,972,928
Other short-term borrowings 603,343 469,265
Notes payable 114,998 149,990
Acceptances outstanding 20,513 65,928
Accrued taxes and other expenses 398,007 373,152
Other liabilities 831,597 167,993
Long-term debt 127,942 128,939
Total Liabilities 20,598,950 17,615,149
Stockholder's Equity
Preferred stock, no par: authorized 3,500,000; issued none
Common stock, $1 par: authorized 112,000,000
issued 76,431,000 and 75,874,000 76,431 75,874
Surplus 29,348 19,253
Retained Earnings 1,072,922 1,009,847
Total Stockholders' Equity 1,178,701 1,104,974
Total Liabilities and Stockholders' Equity $ 21,777,651 $18,720,123
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
Consolidated Statement of Cash Flows
Six Months ended June 30,
(Dollars in thousands)
(Unaudited)
1994 1993
Operating Activities
Net income $ 102,331 $ 85,872
Noncash charges for depreciation, amortization, provision for
loan losses and foreclosed properties and deferred income 96,129 69,276
Net income adjusted for noncash charges 198,460 155,148
Adjustments to reconcile to net cash provided (used)
by operating activities:
Securities (gains) losses, net 2,283 (11,685)
Net change in:
Accrued income receivable (57,034) (19,814)
Accrued taxes and other expenses 12,652 1,947
Trading account assets (540,797) (72,283)
Other, net (47,495) (18,501)
Net Cash Provided by Operating Activities (431,931) 34,812
Investing Activities
Payments for purchases of:
Held to maturity securities (1,963,326) (1,528,270)
Available-for-sale securities (869,942) (740,685)
Lease financing assets (149,653) (175,350)
Premises and equipment (63,942) (66,258)
Proceeds from:
Maturities of held to maturity securities 1,851,068 975,790
Maturities of investment securities available for sale 290,902
Sales of investment securities available for sale 160,010 727,110
Principal collected from lease financing 26,945 17,415
Net (payments for) proceeds from:
Interest-bearing deposits with banks 567,189 (479,392)
Federal funds sold and securities purchased
under resale agreements (1,252,178) 43,542
Loans (548,090) (391,076)
Net Cash Used by Investing Activities (1,951,017) (1,617,174)
Financing Activities
Proceeds from issuance of:
Nonrecourse debt for lease financing 110,147 151,250
Common stock 5,593 3,301
Payments for:
Nonrecourse debt for lease financing (26,080) (18,607)
Long-term debt (384) (38,848)
Cash dividends (22,125) (18,836)
Net proceeds from (payments for):
Deposits 1,708,541 530,541
Short-term borrowings 633,918 1,085,434
Net Cash Provided by Financing Activities 2,409,610 1,694,235
Net Increase (Decrease) in Cash and Due From Banks 26,662 111,873
Cash and due from banks at beginning of period 1,469,395 1,284,467
Cash and Due From Banks at End of Period $ 1,496,057 $ 1,396,340
Supplemental Disclosure
Interest paid $ 214,575 $ 180,201
Income taxes paid 27,520 27,268
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
Consolidated Statement of Changes in Stockholders' Equity
Six Months ended June 30,
(Dollars in thousands)
(Unaudited)
1994 1993
Beginning Balance $ 1,104,974 $ 953,135
Net Income 102,331 85,872
Cash dividends declared (22,125) (18,836)
Issuance of common stock 10,653 6,387
Foreign currency translation 4,945 (37)
Unrealized loss on available-for-sale securities,
net of taxes (22,077)
Ending Balance $ 1,178,701 $1,026,521
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Basis of Presentation
The consolidated financial statements include the accounts of State Street
Boston Corporation ("State Street") and its subsidiaries, including its
principal subsidiary, State Street Bank and Trust Company ("State Street
Bank"). All significant intercompany transactions have been eliminated upon
consolidation. Certain previously reported amounts have been reclassified to
conform to the current method of presentation. State Street's investment in
its 50%-owned affiliate, Boston Financial Data Services, Inc., is accounted
for by the equity method.
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," was adopted by State Street
effective January 1, 1994. SFAS No. 115 requires that debt and equity
securities for which State Street does not have the positive intent or ability
to hold to maturity and that are not considered to be part of trading-related
activities be classified as available-for-sale securities and reported at their
fair values, with unrealized gains and losses reported on a net-of-tax basis as
a separate component of stockholders' equity. At June 30, 1994, the unrealized
pre-tax loss on available-for-sale securities was $38,832,000. Held to maturity
investments are stated at cost, adjusted for amortization of premiums and
accretion of discounts. Securities classified as available-for-sale are
purchased in connection with State Street's interest-rate risk management and
may be sold in response to changes in interest rates and other factors. Gains
or losses on securities sold are computed based on identified costs and included
in fee revenue.
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts" was adopted by State Street during the
first quarter of 1994. Interpretation No. 39 changes the reporting of
unrealized gains and losses on interest rate and foreign exchange contracts on
the balance sheet. The interpretation requires that gross unrealized gains be
reported as assets and gross unrealized losses be reported as liabilities. The
amounts were previously shown on a net basis on the balance sheet. The
interpretation, however, permits netting of such unrealized gains and losses
with the same counterparty when master netting agreements have been executed.
At June 30, 1994, a total of $686 million is included in other assets and other
liabilities for gross unrealized gains and gross unrealized losses,
respectively.
For the Consolidated Statement of Cash Flows, State Street has defined cash
equivalents as those amounts included in the Statement of Condition caption,
"Cash and due from banks." For the six months ended June 30, 1994 and 1993,
long-term debt converted into common stock was $632,000 and $408,000,
respectively.
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 June 30, 1994 and December 31, 1993, and
its cash flows for the six months ended June 30, 1994 and 1993, and the
consolidated results of its operations for the three months and six months
ended June 30, 1994 and 1993 have been made. These statements should be read
in conjunction with the financial statements, notes and other information
included in State Street's latest annual report on Form 10-K.
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note B - Investment Securities
Investment securities consisted of the following:
(Dollars in thousands) June 30, 1994 December 31, 1993
Cost Market Cost Market
Held to maturity
U.S. Treasury and
Federal agencies $1,339,055 $1,321,637 $1,272,370 $1,282,219
State and political
subdivisions 930,064 918,905 1,083,879 1,090,391
Asset-backed securities 2,239,542 2,192,684 2,028,099 2,033,554
Other investments 64,710 64,498 99,756 101,084
Total 4,573,371 4,497,724 4,484,104 4,507,248
Available for sale
U.S. Treasuries 1,564,348 1,526,395 1,121,605 1,126,008
Other investments 79,159 78,280 95,490 95,913
Total 1,643,507 1,604,675 1,217,095 1,221,921
Total investment
securities $6,216,878 $6,102,399 $5,701,199 $5,729,169
Note C - Allowance for Loan Losses
The adequacy of the allowance for loan losses is evaluated on a regular basis by
management. Factors considered in evaluating the adequacy of the allowance
include previous loss experience, current economic conditions and their effect
on borrowers, and the performance of individual credits in relation to contract
terms. The provision for loan losses charged to earnings is based upon
management's judgment of the amount necessary to maintain the allowance at a
level adequate to absorb probable losses.
Changes in the allowance for loan losses were as follows:
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
1994 1993 1994 1993
Balance at beginning of period $54,987 $55,207 $54,316 $57,931
Provision for loan losses 3,182 2,880 6,352 5,560
Loan charge-offs (2,782) (4,019) (5,884) (9,855)
Recoveries 560 261 1,163 693
Allowance of subsidiary
purchased 1,405 1,405
Balance at end of period $55,947 $55,734 $55,947 $55,734
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note D - Income Taxes
The provision for income taxes included in the Consolidated Statement of Income
is comprised of the following:
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
1994 1993 1994 1993
Current $18,371 $14,852 $28,423 $30,208
Deferred 9,111 8,243 28,959 14,688
Total provision $27,482 $23,095 $57,382 $44,896
The provision for income taxes is less than the combined U.S. corporate tax rate
of 35% for 1994 and 34% for 1993, and the applicable state tax rates in both
periods primarily because of tax exempt income and tax credits.
Note E - Fee Revenue - Other
The following items are included in the other category of fee revenue:
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
1994 1993 1994 1993
Foreign exchange trading $29,079 $20,537 $ 63,166 $ 36,591
Processing service fees 15,844 11,184 29,768 21,647
Service fees 11,711 9,446 22,945 18,517
Securities gains (losses) net 729 5,172 (2,283) 11,685
Trading account profits (687) 673 848 2,726
Other 8,325 6,639 19,210 12,047
Total fee revenue - other $65,001 $ 53,651 $133,654 $103,213
Note F - Operating Expenses - Other
The following items are included in the other category of operating expenses:
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
1994 1993 1994 1993
Contract services $ 21,601 $ 14,931 $ 43,423 $ 29,370
Professional services 10,725 8,552 22,248 16,464
Advertising and sales promotion 6,310 4,977 12,320 9,460
Telecommunications 5,638 5,514 11,514 10,962
Postage, forms and supplies 5,270 5,070 10,884 10,290
FDIC and other insurance 4,926 4,730 10,410 8,756
Other 11,294 11,544 24,129 22,973
Total operating
expenses - other $ 65,764 $ 55,318 $134,928 $108,275
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note G - Commitments and Contingent Liabilities
State Street provides custody, accounting and information services to mutual
fund, master trust/master custody/global custody, corporate trust and defined
contribution plan customers; and investment management services to institutions
and individuals. Assets under custody and management, held by State Street in
fiduciary or custody capacity, are not included in the Consolidated Statement of
Condition since 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 June 30, 1994 that would have a material
adverse effect on State Street's financial position or results of operations.
State Street is subject to pending and threatened legal actions that arise in
the normal course of business. In the opinion of management, after discussion
with counsel, these can be successfully defended or resolved without a material
adverse effect on State Street's financial position or results of operations.
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note H - Earnings Per Common Share
The computation of earnings per common share is based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
each period. The computation of fully diluted earnings per share is based on
the assumption that the convertible capital notes and debentures had been
converted as of the beginning of each year with the elimination of related
interest expense less income tax effect. The computation of earnings per share
is as follows:
(Dollars in thousands, Three Months Ended Six Months Ended
except per share data) June 30, June 30,
1994 1993 1994 1993
Primary
Average shares outstanding 76,319,009 75,346,022 76,184,430 75,295,714
Common stock equivalents 562,880 700,445 588,001 825,660
Primary shares outstanding 76,881,889 76,046,467 76,772,431 76,121,374
Net income $51,041 $43,217 $102,331 $ 85,872
Earnings Per Share-primary$ .66 $ .57 $ 1.33 $ 1.13
Fully Diluted
Average shares outstanding 76,319,009 75,346,022 76,184,430 75,295,714
Common stock equivalents 562,880 700,445 598,551 825,660
Assumed conversion of 7 3/4%
convertible subordinated
debentures 657,919 1,032,174 677,362 1,046,317
Assumed conversion of 5%
convertible notes - 41,323 - 41,323
Fully diluted average
shares outstanding 77,539,808 77,119,964 77,460,343 77,209,014
Net income $51,041 $43,217 $102,331 $ 85,872
Elimination of interest on
7 3/4% convertible subordinated
debentures and 5% convertible
notes less related income tax
effect 39 67 81 131
Fully diluted net income $51,080 $43,284 $102,412 $86,003
Earnings Per Share-fully
diluted $ .66 $ .56 $ 1.32 1.11
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Stockholders and Board of Directors
State Street Boston Corporation
We have reviewed the accompanying consolidated statement of condition of State
Street Boston Corporation as of June 30, 1994, and the related consolidated
statements of income for the three-month and six month periods ended June 30,
1994 and 1993 and changes in stockholder's equity and cash flows for the six
month period ended June 30, 1994 and 1993. 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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of condition of State Street Boston
Corporation as of December 31, 1993 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 13, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated statement of
condition as of December 31, 1993, is fairly stated, in all materials respects,
in relation to the consolidated statement of condition from which it has been
derived.
ERNST & YOUNG LLP
Boston, Massachusetts
July 18, 1994
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY
State Street reported another quarter of solid year-over-year growth,
benefitting from cross-border investment and the growth of business outside
the United States. New customers were added and existing customers used more
services.
Second quarter earnings per share were $.66 on a fully diluted basis, an
increase of 18% from $.56 per share in the second quarter of 1993. Net
income in the quarter was $51.0 million, up 18% from $43.2 million a year
ago. Return on stockholders' equity was 17.6%. The earnings per share gain
reflected total revenue of $334.7 million, up $52.4 million, or 19%, partially
offset by increased expenses to support growth and continued investment
spending.
Year-to-date, earnings per share were $1.32 on a fully diluted basis, compared
to $1.11 per share a year ago.
Condensed Income Statement
Taxable Equivalent Basis
(Dollars in millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 Change % 1994 1993 Change %
Fee revenue $240.6 $205.3 $ 35.3 17 $489.3 $399.3 $ 90.0 23
Interest revenue 207.8 176.2 31.6 18 405.7 343.5 62.2 18
Interest expense 110.5 96.3 14.2 15 213.8 183.5 30.3 17
Net interest revenue 97.3 79.9 17.4 22 191.9 160.0 31.9 20
Provision for loan losses 3.2 2.9 .3 10 6.3 5.6 .7 13
Net interest revenue after
provision for loan losses 94.1 77.0 17.1 22 185.6 154.4 31.2 20
Total revenue 334.7 282.3 52.4 19 674.9 553.7 121.2 22
Operating expenses 250.4 211.6 38.8 18 503.5 414.7 88.8 21
Income before taxes 84.3 70.7 13.6 19 171.4 139.0 32.4 23
Income taxes 27.5 23.1 4.4 19 57.4 44.9 12.5 28
Taxable equivalent adjustment 5.8 4.4 1.4 32 11.7 8.3 3.4 41
Net income $ 51.0 $ 43.2 $ 7.8 18 $102.3 $ 85.8 $ 16.5 19
Earnings Per Share
Primary $ .66 $ .57 $ .09 16 $ 1.33 $ 1.13 $ .20 18
Fully diluted .66 .56 .10 18 1.32 1.11 .21 19
($ and % change based on dollars in thousands)
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TOTAL REVENUE
Total revenue was $334.7 million, up $52.4 million, or 19%, from a year ago.
Assets under custody were $1.6 trillion, up $144 billion, or 10%, from a year
ago due to net new business and additional business from existing customers.
Revenue benefitted particularly from growth in non-U.S. securities. Non-U.S.
securities under custody and non-U.S. transactions were both up 57% over a year
ago. Multicurrency accounting, settlement and other complex services associated
with non-U.S. assets and transactions result in higher revenue than for U.S.
securities. As reported previously, a corporate trust customer with $47 billion
of assets assumed custody of its own assets in the second quarter of 1994.
Assets under management were $139 billion, up 8% from a year ago.
Year-to-date total revenue was $674.9 million, an increase of $121.2 million, or
22%, from 1993.
FEE REVENUE
Fee revenue was $240.6 million, up $35.3 million, or 17%, from the second
quarter of 1993.
Fiduciary compensation, the largest component of fee revenue, was $175.6
million, up $24.0 million, or 16%. Fiduciary compensation is derived from
accounting, custody, information services, recordkeeping, investment management
and trusteeship services.
Volume growth and increased complexity of services drove the year-over-year
growth in fiduciary compensation from servicing mutual funds. Mutual fund
assets under custody increased 8%, with non-U.S. assets up 58%. The total
number of trades processed increased by 18%. The number of funds serviced
increased to 2,263, up 264 from a year ago. Additional funds offered multiple
classes of shares and funds expanded the number of classes offered, each class
with its own accounting and pricing requirements.
Revenue from investment management grew substantially across the product line
due to new business and additional contributions from existing customers.
Non-U.S. locations also contributed, with revenue up over 30% due to new
customers and existing customers using more services.
The year-over-year growth in fiduciary revenue was restrained by lower revenue
from U.S. securities lending. Increases in short-term U.S. interest rates
caused spreads earned on U.S. securities lent to narrow temporarily. Excluding
securities lending, fiduciary compensation increased 19%.
Foreign exchange revenue was $29.1 million, up $8.5 million, or 42%, from a year
ago and reflected a substantial increase in cross-border investment activity by
customers.
The year-over-year growth in fee revenue benefitted from an increase in
processing service fees of $4.7 million, due in part to a fourth quarter
acquisition; an increase in service fees of $2.3 million; and currency
translation of $3.8 million on the foreign bond portfolio. Growth in fee
revenue was restrained by lower gains on leasing residuals, down $3.6
million, and lower net securities gains, down $4.4 million.
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six-month period ending June 30, 1994, fee revenue was $489.3 million,
up $90 million, or 23%, over 1993. The increase resulted primarily from growth
in fiduciary revenue, up $59.6 million, or 20%, and additional foreign exchange
revenue of $26.6 million.
NET INTEREST REVENUE
Taxable equivalent net interest revenue was $97.3 million, up $17.4 million, or
22%, over the same quarter a year ago, reflecting increased and more effective
use of the balance sheet to support financial asset services customers.
Average interest-earning assets grew $2.0 billion, or 12%, to $18.0 billion.
Additional domestic and foreign securities settlement advances and other loans
to financial asset services customers, and loans to securities brokers were the
primary reason for a $1.2 billion, or 49% increase, in average loans. These
types of loans, which are primarily short-term and backed by investment
securities held at State Street, now constitute nearly half of the total loan
portfolio. Traditional commercial loans, which comprised 9% of total average
assets for the quarter, grew $316 million, or 19%, with growth occurring in
commercial loans, trade finance, and leases.
Asset growth was funded by additional short-term funds from customers, due in
part to the increase in transaction volume. Noninterest-bearing deposits
increased $1.1 billion to $4.5 billion, and foreign deposits were up $2.4
billion to $7.3 billion.
Three-quarters of the increase in foreign loans and some of the increase in
foreign deposits reflect the continuing program to streamline the cash component
of State Street's global financial asset servicing capabilities by redesigning
our subcustody network. Customers' funds are being moved from subcustodian
banks to State Street.
As a result of the changing mix of the balance sheet -- additional loans and
additional relatively lower cost liabilities -- the net interest margin
increased from 2.00% to 2.17% and the spread between interest rates earned
and paid increased from 1.44% to 1.57%.
Three Months Ended
June 30,
1994 1993
Average Average
Balance Rate Balance Rate
(Dollars in millions)
Interest-earning $17,985 4.63% $16,018 4.41%
assets
Interest-bearing 14,476 3.06 12,992 2.97
liabilities
Excess of rate earned
over rate paid 1.57% 1.44%
Net interest margin 2.17% 2.00%
For the six-month period ending June 30, 1994, taxable equivalent net interest
income was $192.0 million, up 20% from 1993 due primarily to balance sheet
growth.
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Operating expenses of $250.5 million were up $38.9 million, or 18%, from the
second quarter of 1993 to accommodate growth and the ongoing investment spending
program. Salaries and employee benefits were $139.2 million, up $23.5 million,
or 20%, due in part to a 10% increase in staff and higher expenses for incentive
compensation, temporary help and overtime. Other expenses of $65.8, up $10.4
million, or 19%, reflected the increased volume of transactions, as well as
higher expenses for professional services and advertising.
Investment spending, which is determined by strategic needs, continued as
planned, and benefits were realized. State Street now directly services
portfolio managers with a fixed-income workstation, using capabilities of
Global Horizon Interchange to integrate data from various sources.
Terminals on Global Horizon Interchange now total approximately 1,200.
For the six-month period ending June 30, 1994, operating expenses were $503.6
million, up $88.8 million, or 21%, over 1993 for the same reasons given above.
CREDIT QUALITY
At June 30, 1994, total loans were $3.3 billion. Excluding securities
settlement advances and other loans to financial asset services customers
and loans to securities brokers, loans were $2.1 billion, 9% of total assets.
The provision for loan losses charged against income was $3.2 million, up from
$2.9 million a year ago. During the quarter, the allowance for loan losses
increased from $55.0 million to $55.9 million and the allowance for loan losses
as a percentage of ending loans increased to 1.72%.
Loan ratios 1994 1993
2Q 1Q 4Q 3Q 2Q 1Q
Allowance to ending loans 1.72% 1.67% 2.03% 2.11% 2.31% 2.60%
Net charge-offs
to average loans .25 .30 .50 .50 .63 .98
Non-performing loans to
ending loans .83 .70 1.00 1.15 1.44 2.00
Second quarter net charge-offs were $2.2 million, down from $3.8 million in the
second quarter of 1993. During the second quarter, non-performing loans
increased from $23.0 million to $26.9 million. The addition of loans to two
cable television companies was partially offset by charge-offs and other
reductions. At quarter end, non-performing assets of $33.7 million were carried
at 43% of their original value.
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Non-performing assets 1994 1993
2Q 1Q 4Q 3Q 2Q 1Q
Non-accrual loans:
Commercial and financial $24.7 $20.7 $24.7 $27.7 $32.3 $34.2
Real estate .9 1.0 .5 .7 .7 5.4
Other 1.3 1.3 1.6 1.6 1.7 2.8
Total non-accrual loans 26.9 23.0 26.8 30.0 34.7 42.4
Other real estate owned 6.8 6.8 11.1 11.8 13.1 11.1
Total non-performing
assets $33.7 $29.8 $37.9 $41.8 $47.8 $53.5
Credit quality continues to improve.
TAXES
The effective tax rate of 35.0% for the second quarter is more indicative of the
rate for the rest of 1994 than the effective tax rate for the first quarter,
which was 36.8%.
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LINES OF BUSINESS
The estimated results for State Street's two lines of business are derived from
internal accounting systems, which are continually refined to reflect
organizational performance. These systems allocate to each business revenue and
expenses related to the business, as well as certain corporate overhead,
operations and systems development expenses. They also incorporate processes for
allocating assets and liabilities to each business, including the interest rates
appropriate to each allocation. Capital is allocated using the Federal
regulatory guidelines as a basis, coupled with management's judgement regarding
the operational risks inherent in the businesses. The capital allocations may
not be representative of the capital levels that would be required if these two
lines of business were independent business units.
This section of financial review presents performance results of State Street's
two lines of business: financial asset services and commercial lending. The
following line-of-business information is based on management accounting
practices that conform to and support the strategic objectives and management
structure of State Street and are not necessarily comparable with similar
information for any other banking company:
LINES OF BUSINESS
(Taxable equivalent basis, Financial Commercial
dollars in millions) Asset Services Lending Corporate
Three Months ending June 30, 1994 1993 1994 1993 1994 1993
Fee revenue $233.9 $195.9 $ 8.2 $11.0 $(1.5) $(1.6)
Net interest revenue 73.6 61.1 26.1 21.2 (2.4) (2.4)
Provision for loan losses .3 .1 2.9 2.8 .0 .0
Total revenue 307.2 256.9 31.4 29.4 (3.9) (4.0)
Operating expenses 226.7 188.3 18.5 16.8 5.3 6.5
Income before income taxes 80.5 68.6 12.9 12.6 (9.2) (10.5)
Income taxes 37.9 29.9 5.7 5.3 (10.4) (7.7)
Net income $ 42.6 $ 38.7 $ 7.2 $ 7.3 $ 1.2 $(2.8)
Percentage contribution 84% 90% 14% 17% 2% (7)%
Average assets $18,849 $15,939 $2,264 $1,936
FINANCIAL ASSET SERVICES. Financial asset services, which contributed 84% of
State Street's net income for the three months ending June 30, 1994 is comprised
of business components that service and manage financial assets worldwide. These
include services for mutual funds and pension plans, both defined benefit and
defined contribution; corporate trusteeship; and management of institutional
financial assets and personal trust. A broad array of banking services is
provided, including accounting, custody of securities, information services and
recordkeeping; taking short-term customer funds onto State Street's balance
sheet; investment management; foreign exchange trading; and cash management.
Revenue for these services is reflected in fee revenue and net interest revenue.
In the second quarter of 1994, net income of $42.6 million increased $3.9
million, or 10%, from the same quarter a year ago. Total revenue growth of
$50.3 million, or 20% was partially offset by a $38.4 million, or 20%,
increase in operating expenses.
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Fee revenue increased $38.0 million, or 19%, with fiduciary compensation up
$24.0 million and foreign exchange revenue up $8.5 million. Taxable
equivalent net interest revenue grew $12.5 million, or 20%, primarily due to
balance sheet growth. Growth in operating expenses reflected expenses
supporting growth and the ongoing investment spending program.
COMMERCIAL LENDING. In the second quarter of 1994, commercial lending
contributed 14% of net income. Net income decreased $.1 million, due
to lower fee revenue and higher expenses, partially offset by higher net
interest revenue. Taxable equivalent net interest revenue increased $4.9
million, or 23%, due to growth in commercial and financial loans; foreign
loans, due in part to an acquisition; loans to broker/dealers, and leases.
Fee revenue decreased $2.8 million, or 25%, due to lower gains on leasing
residuals, down $3.6 million, partially offset by increased trade banking
fees, primarily due to an acquisition. Operating expenses increased $1.7
million, or 10%, due to increased salaries and employee benefits
expense and expenses related to increased volumes, partially offset by less
expenses for other real estate owned.
CORPORATE. Corporate includes the impact of long-term debt; investment of
corporate cash; tax credits from tax-advantaged financings, including writedowns
of these investments in fee revenue; operating expenses; and other corporate
items.
In the second quarter of 1994, these corporate items contributed 2% of net
income.
LINES OF BUSINESS
(Taxable equivalent basis, Financial Commercial
dollars in millions) Asset Services Lending Corporate
Six Months ending June 30, 1994 1993 1994 1993 1994 1993
Fee revenue $472.8 $382.7 $ 19.7 $ 20.2 $(3.2) $ (3.6)
Net interest revenue 146.4 122.9 49.7 41.8 (4.1) (4.7)
Provision for loan losses .6 .2 5.8 5.4 .0 .0
Total revenue 618.6 505.4 63.6 56.6 (7.3) (8.3)
Operating expenses 452.7 369.0 37.2 32.0 13.7 13.6
Income before income taxes 165.9 136.4 26.4 24.6 (21.0) (21.9)
Income taxes 75.7 59.1 11.5 10.3 (18.2) (16.2)
Net income $ 90.2 $ 77.3 $ 14.9 $ 14.3 $(2.8) $(5.7)
Percentage contribution 88% 90% 15% 17% (3)% (7)%
Average assets $19,021 $14,978 $2,267 $1,900
FINANCIAL ASSET SERVICES. For the six months ending June 30, 1994 net income
increased $12.9 million, or 17% from a year ago. Total revenue increased $113.2
million, or 22% and operating expenses were up $83.7 million.
COMMERCIAL LENDING. Year-to-date, net income increased $.6 million from a year
ago. Taxable equivalent net interest revenue increased $7.9 million, or 19%
primarily due to growth in loans. Operating expenses increased $5.2 million, or
16% for the same reasons given above for the quarter.
CORPORATE. For the six months ending June 30, 1994, corporate items reduced net
income by 3%. The net income reduction of $2.8 million as compared with a
reduction of $5.7 million a year ago.
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ACCOUNTING CHANGES
In the first quarter of 1994, State Street adopted Financial Accounting
Standards Board Interpretation No. 39, "Offsetting of Amounts Related To
Certain Contracts." This new accounting requirement for all corporations
mandated that both unrealized gains and losses on certain off-balance sheet
instruments be included on the balance sheet. In the past, unrealized gains
or losses were shown net on the balance sheet. For State Street, the primary
instrument affected was forward foreign exchange contracts, due in part to the
treasury services provided to global financial asset services customers. Market
risk of these instruments is controlled under State Street's credit and
counterparty risk management system. Most of the contracts are for 90 days or
less, which results in a portfolio of relatively short maturity. At June 30,
approximately $686 million of unrealized gains and losses relating to
off-balance sheet instruments were added to both other assets and other
liabilities on the balance sheet. This reporting change did not affect the
risk-based capital ratios, which have always included these off-balance sheet
instruments.
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" was adopted on January 1, 1994. This
standard requires that available-for-sale securities be reported at fair value,
with any unrealized gains and losses, net of taxes, reflected as a separate
component of stockholders' equity. At January 1, 1994 the fair value of the
available-for-sale portfolio exceeded this aggregate amortized cost by $4.8
million. This will create variability in stockholders' equity.
CAPITAL AND LIQUIDITY
State Street has a strong capital position to support current operations and
growth, and continues to generate capital internally at a high rate. In the
second quarter, the internal capital generation rate was 13.6%.
At June 30, 1994, State Street's capital and leverage ratios exceeded the
regulatory guidelines:
Minimum
State Regulatory
Street Guidelines
Risk-based capital ratios:
Tier 1 capital 11.3% 4.0%
Total capital 11.8 8.0
Leverage ratio 5.5 3.0
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
State Street expects to grow the balance sheet commensurate with growth in
equity, maintaining capital ratios at State Street Bank which qualify for the
"well-capitalized" designation. The corporation's objectives are to optimize
the use of the balance sheet and to fully service customers, with emphasis on
those services which State Street is well positioned to provide.
Liquidity is required to replace maturing liabilities, accommodate the
transaction and cash management requirements of State Street's customers,
meet loan commitments and accommodate other corporate needs. Liquidity is
provided from the ability to access global market sources of funding and gather
additional deposits, and from maturing short-term assets, sale of available for
sale securities and payment of loans.
State Street manages its assets and liabilities to maintain a high level of
liquidity. The Corporation has an extensive and diverse funding base inside and
outside the United States. A significant percentage of funding comes from
customers who have other relationships with State Street, particularly those
using financial asset services worldwide. Deposits are accessed through
domestic as well as international treasury centers, providing a cost-effective,
geographically diverse source of funding. Significant funding is also provided
from institutional customers' demand for repurchase agreements for their
short-term investment needs. State Street maintains other funding alternatives,
ensuring access to additional sources of funds if needed. Relationships are
maintained with a variety of investors, for a range of financial instruments, in
various markets and time zones.
State Street maintains a large portfolio of liquid assets. At June 30, 1994, the
portfolio included $4.6 billion of interest-bearing deposits with banks and
$2.2 billion of securities purchased under resale agreements. Although not
relied on for daily liquidity needs, the $1.6 billion available-for-sale
portfolio of marketable securities provides a significant secondary source of
liquidity.
State Street maintains strong liquidity ratios. When liquidity is measured by
the ratio of liquid assets to total assets, State Street ranks among the highest
of U.S. banking companies. Liquid assets consist of cash and due from banks,
interest-bearing deposits with banks, Federal funds sold, securities purchased
under resale agreements, trading account assets and investment securities. At
June 30, 1994, the Corporation's liquid assets were 77% of total assets.
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ENVIRONMENTAL FACTORS
Given second quarter results, we want to point out that there are factors in our
environment that can influence short-term earnings performance. The particular
factors that are causing us to be cautious are:
1. Part of our revenue is linked to asset-based fees and is thus sensitive to
changes in prices of securities. However, because of the broadening range of
services used by customers, a decreasing percentage of total revenue is
affected.
2. While we focus our foreign exchange trading operations on our customers'
transactions, and we expect this source of revenue to grow commensurate with
the growth in cross-border investing, we acknowledge some variability in this
revenue stream.
3. If U.S. dollar interest rates continue to rise, we expect two effects. With
two-thirds of our funding in U.S. dollars, the growth rate of net interest
revenue could be temporarily restrained. Securities lending revenue, which
is included in the fiduciary compensation line of the income statement, as
expected, reflects lower interest rate spreads. Revenue from securities
lending is less than 5% of our total revenue.
GOALS
State Street has a primary financial goal and supporting goals. The primary
financial goal continues to be sustainable real growth in earnings per share. In
support of that goal, the company aims for superior long-term performance. That
translates into an ROE goal of 18%. This is an annual goal, not a goal for each
and every quarter.
State Street also has a revenue goal, which is expressed in real terms, or
adjusted for inflation. In the 80's, real revenue grew at an annual compound
growth rate of 12.5% per year. State Street aims to repeat that record in the
90's.
Part II - Other Information
Item 1. Legal Proceedings
Reference is made to Note G to the Consolidated Financial Statements on Page 9.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibit Index
Exhibit Number Page of this Report
15 Letter re: Unaudited interim 24
financial information
(b)Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STATE STREET BOSTON CORPORATION
Date: August 9, 1994 By: /s/ George J. Fesus
George J. Fesus
Executive Vice President, Chief Financial
Officer and Treasurer
Date: August 9, 1994 By: /s/ Rex S. Schuette
Rex S. Schuette
Senior Vice President and Comptroller