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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 SEPTEMBER 30, 1996
[ ] 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 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 NO.)
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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
OCTOBER 31, 1996 WAS 82,692,346.
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STATE STREET BOSTON CORPORATION
Table of Contents
Page
Part I. Financial Information
Part I. Item 1. Financial Statements
Consolidated Statement 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 6-11
Independent Accountants' Review Report 12
Part I. Item 2.
Management's Discussion and Analysis of Financial Condition 13-21
and Results of Operations
Part II. Other Information
Part II. Item 1.
Legal Proceedings 22
Part II. Item 2.
Changes in Securities 22
Part II. Item 3.
Defaults Upon Senior Securities 22
Part II. Item 4.
Submission of Matters to a Vote of Security Holders 22
Part II. Item 5.
Other Information 22
Part II. Item 6.
Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibits 24-32
PART I. ITEM 1. FINANCIAL STATEMENTS
STATE STREET BOSTON CORPORATION
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
- --------------------------------------------------------------------------------
INTEREST REVENUE
Deposits with banks $ 83,220 $ 74,599
Investment securities:
U.S. Treasury and Federal agencies 73,308 52,467
State and political subdivisions 18,218 12,958
Other investments 33,359 33,161
Loans 70,752 61,016
Securities purchased under resale agreements,
securities borrowed and Federal funds sold 84,812 100,815
Trading account assets 4,879 6,286
-------- --------
Total interest revenue 368,548 341,302
INTEREST EXPENSE
Deposits 105,403 104,287
Other borrowings 119,604 125,906
Long-term debt 4,862 2,127
-------- --------
Total interest expense 229,869 232,320
-------- --------
Net interest revenue 138,679 108,982
Provision for loan losses 2,000 2,001
-------- --------
Net interest revenue after
provision for loan losses 136,679 106,981
FEE REVENUE
Fiduciary compensation 258,902 214,415
Other 65,356 69,367
-------- --------
Total fee revenue 324,258 283,782
-------- --------
REVENUE BEFORE OPERATING EXPENSES 460,937 390,763
OPERATING EXPENSES
Salaries and employee benefits 194,314 164,966
Occupancy, net 24,959 21,145
Equipment 35,422 32,242
Other 95,329 82,333
-------- --------
Total operating expenses 350,024 300,686
-------- --------
Income before income taxes 110,913 90,077
Income taxes 37,298 25,441
-------- --------
NET INCOME $ 73,615 $ 64,636
======== ========
EARNINGS PER SHARE
Primary $ .91 $ .78
Fully diluted .90 .77
AVERAGE SHARES OUTSTANDING (in thousands)
Primary 81,007 83,172
Fully diluted 81,634 83,911
CASH DIVIDENDS DECLARED PER SHARE $ .19 $ .17
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
- --------------------------------------------------------------------------------
INTEREST REVENUE
Deposits with banks $ 255,203 $ 210,469
Investment securities:
U.S. Treasury and Federal agencies 184,380 194,954
State and political subdivisions 50,296 38,199
Other investments 92,352 102,978
Loans 203,695 177,393
Securities purchased under resale agreements,
securities borrowed and Federal funds sold 258,486 249,737
Trading account assets 12,508 16,454
---------- ----------
Total interest revenue 1,056,920 990,184
INTEREST EXPENSE
Deposits 319,957 307,005
Other borrowings 323,435 361,524
Long-term debt 9,366 6,403
---------- ----------
Total interest expense 652,758 674,932
---------- ----------
Net interest revenue 404,162 315,252
Provision for loan losses 6,001 6,001
---------- ----------
Net interest revenue after
provision for loan losses 398,161 309,251
FEE REVENUE
Fiduciary compensation 748,527 599,936
Other 205,389 222,305
---------- ----------
Total fee revenue 953,916 822,241
---------- ----------
REVENUE BEFORE OPERATING EXPENSES 1,352,077 1,131,492
OPERATING EXPENSES
Salaries and employee benefits 564,308 474,866
Occupancy, net 74,816 62,727
Equipment 102,304 93,057
Other 281,304 234,063
---------- ----------
Total operating expenses 1,022,732 864,713
---------- ----------
Income before income taxes 329,345 266,779
Income taxes 114,472 85,146
---------- ----------
NET INCOME $ 214,873 $ 181,633
========== ==========
EARNINGS PER SHARE
Primary $ 2.63 $ 2.19
Fully diluted 2.61 2.17
AVERAGE SHARES OUTSTANDING (in thousands)
Primary 81,609 83,035
Fully diluted 82,284 83,792
CASH DIVIDENDS DECLARED PER SHARE $ .56 $ .50
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
(UNAUDITED)
- --------------------------------------------------------------------------------
September 30, December 31,
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,436,809 $ 1,421,941
Interest-bearing deposits with banks 6,206,406 5,975,178
Securities purchased under resale agreements
and securities borrowed 3,895,363 5,406,619
Federal funds sold 1,911,762 347,500
Trading account assets 200,111 503,839
Investment securities:
Held to maturity 851,871 824,399
Available for sale 7,842,463 5,535,364
------------ ------------
Total investment securities 8,694,334 6,359,763
Loans 4,251,752 3,986,142
Allowances for loan losses (71,421) (63,491)
------------ ------------
Net loans 4,180,331 3,922,651
Premises and equipment 454,748 467,588
Customers' acceptance liability 36,351 57,472
Accrued income receivable 449,371 392,074
Other assets 979,332 930,562
------------ ------------
TOTAL ASSETS $ 28,444,918 $ 25,785,187
============ ============
LIABILITIES
Deposits:
Noninterest-bearing $ 6,033,131 $ 5,082,064
Interest-bearing:
Domestic 2,241,503 2,150,697
Foreign 9,101,586 9,414,458
------------ ------------
Total deposits 17,376,220 16,647,219
Federal funds purchased 105,994 467,305
Securities sold under repurchase agreements 6,892,282 5,120,950
Other short-term borrowings 816,011 443,203
Notes payable 89,587 175,218
Acceptances outstanding 37,357 57,387
Accrued taxes and other expenses 610,706 562,304
Other liabilities 618,464 597,501
Long-term debt 275,869 126,576
------------ ------------
TOTAL LIABILITIES 26,822,490 24,197,663
STOCKHOLDERS' EQUITY
Preferred stock, no par: authorized 3,500,000;
issued none
Common stock, $1 par: authorized 112,000,000;
issued 82,693,000 and 82,695,000 82,693 82,695
Surplus 36,009 40,090
Retained earnings 1,633,617 1,465,007
Net unrealized gain(loss) on
available-for-sale securities (7,714) 12,688
Treasury stock (at cost, 2,556,000 and
307,000 shares) (122,177) (12,956)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,622,428 1,587,524
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,444,918 $ 25,785,187
============ ============
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 214,873 $ 181,633
Noncash charges for depreciation, amortization, provision for
loan losses and foreclosed properties, and deferred income taxes 176,676 115,293
----------- -----------
Net income adjusted for noncash charges 391,549 296,926
Adjustments to reconcile to net cash provided (used) by operating activities:
Securities (gains)losses, net (4,560) (5,903)
Net change in:
Trading account assets 303,728 89,768
Accrued income receivable (57,297) (13,264)
Accrued income taxes and other expenses (11,730) (4,578)
Other, net (36,525) (241,539)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 585,165 121,410
----------- -----------
INVESTING ACTIVITIES
Payments for purchases of:
Held-to-maturity securities (755,686) (1,446,552)
Available-for-sale securities (5,461,957) (1,194,902)
Lease financing assets (377,867) (438,105)
Premises and equipment (70,346) (80,492)
Proceeds from:
Maturities of held-to-maturity securities 728,075 1,931,224
Maturities of available-for-sale securities 2,699,522 82,743
Sales of available-for-sale securities 413,989 3,252,304
Principal collected from lease financing 48,463 41,771
Net (payments for) proceeds from:
Interest-bearing deposits with banks (231,228) (1,154,727)
Federal funds sold, resale agreements and securities borrowed (53,006) (3,146,716)
Loans (151,645) (347,572)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (3,211,686) (2,501,024)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of:
Notes payable 176,588 939,989
Nonrecourse debt for lease financing 281,429 349,832
Common and treasury stock 6,642 3,606
Long-term debt 150,000
Payments for:
Maturities of notes payable (256,936) (808,979)
Nonrecourse debt for lease financing (59,786) (42,420)
Long-term debt (705) (639)
Cash dividends (45,127) (41,288)
Purchase of common stock (123,637) (6,676)
Net proceeds from (payments for):
Deposits 729,001 478,151
Short-term borrowings 1,783,920 1,667,783
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,641,389 2,539,359
----------- -----------
NET INCREASE (DECREASE) 14,868 159,745
Cash and due from banks at beginning of period 1,421,941 1,097,563
----------- -----------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 1,436,809 $ 1,257,308
=========== ===========
SUPPLEMENTAL DISCLOSURE
Interest paid $ 643,024 $ 669,670
Income taxes paid 68,706 48,968
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED
GAIN(LOSS) ON
COMMON RETAINED AVAILABLE-FOR- TREASURY
(DOLLARS IN THOUSANDS) STOCK SURPLUS EARNINGS SALE SECURITIES STOCK TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $ 82,447 $ 37,160 $ 1,273,369 $ (55,840) $ -- $ 1,337,136
Net Income 181,633 181,633
Cash dividends declared-
$.50 per share (41,288) (41,288)
Issuance of common stock-
246,476 shares 247 4,603 4,850
Common Stock acquired-
171,200 shares (6,676) (6,676)
Issuance of treasury stock-
9,796 shares (216) 2,423 371 155
Foreign currency translation 2,423
Change in net unrealized gain(loss)
on available-for-sale securities 60,658 60,658
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1995 $ 82,694 $ 41,547 $ 1,416,137 $ 4,818 $ (6,305) $ 1,538,891
=========== =========== =========== =========== =========== ===========
BALANCE AT DECEMBER 31, 1995 $ 82,695 $ 40,090 $ 1,465,007 $ 12,688 $ (12,956) $ 1,587,524
Net income 214,873 214,873
Cash dividends declared-
$.56 per share (45,127) (45,127)
Common stock acquired-
2,588,900 shares (2) (123,637) (123,639)
Issuance of treasury stock-
340,475 shares (4,081) (1,136) 14,416 10,335
Foreign currency translation (1,136)
Change in net unrealized gain(loss)
on available-for-sale securities (20,402) (20,402)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1996 $ 82,693 $ 36,009 $ 1,633,617 $ (7,714) $ (122,177) $ 1,622,428
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
STATE STREET BOSTON CORPORATION
PART I. ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
State Street Boston Corporation ("State Street") is a financial services
corporation and provides banking, trust, investment management and securities
processing services to both domestic and international customers. State Street's
primary focus is servicing and managing financial assets on a global scale.
State Street reports three lines of business: financial asset services,
investment management and commercial lending. Financial asset services are
primarily accounting, custody, banking and other services for large pools of
assets such as mutual funds and pension plans, and corporate trusteeships.
Investment management services manage financial assets worldwide, both
institutional investment management and personal trust services, and provide
participant recordkeeping for defined contribution plans. Commercial lending
activities include regional middle market, specialized and trade finance lending
as well as asset-based finance and leasing.
The consolidated financial statements include the accounts of State Street and
its subsidiaries, including its principal subsidiary, State Street Bank and
Trust Company. The preparation of financial statements requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. All significant intercompany balances and transactions have been
eliminated upon consolidation. The results of operations of businesses purchased
are included from the date of acquisition. Investments in 50%-owned affiliates
are accounted for by the equity method. Certain previously reported amounts have
been reclassified to conform to the current method of presentation. For the
Consolidated Statement of Cash Flows, State Street has defined cash equivalents
as those amounts included in the Statement of Condition caption, "Cash and due
from banks." For the nine months ended September 30, 1996 and 1995, long-term
debt converted into common stock was $30,000 and $138,000, respectively.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" was
adopted by State Street effective January 1, 1996. SFAS No. 121 addresses how
long-lived assets and certain identifiable intangibles held and used should be
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The adoption of
SFAS No. 121 did not have a material impact on the financial statements of State
Street.
SFAS No. 122, "Accounting for Mortgage Servicing Rights" was adopted by State
Street effective January 1, 1996. SFAS No. 122 requires institutions to
recognize rights to service mortgage loans for others as separate assets,
regardless of how the servicing rights are acquired. In addition, SFAS No. 122
addresses how mortgage servicing rights are to be assessed for impairment based
on their fair value. Prior to January 1, 1996, mortgage servicing rights were
recorded at acquisition cost. The adoption of SFAS No. 122 did not have a
material impact on the financial statements of State Street.
In 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued.
This statement addresses financial accounting and reporting standards for
stock-based employee compensation plans. State Street plans to continue to
measure compensation cost for these plans using the intrinsic value based method
of accounting prescribed by APB opinion No. 25 and will adopt the new disclosure
requirements for the year ended December 31, 1996.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued. This statement provides
standards for transfers and servicing of financial assets and extinguishing
liabilities. Certain provisions of this statement are effective for fiscal years
beginning after December 31, 1996. State Street will adopt the required
provisions of this new statement in 1997.
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 September 30, 1996 and December 31, 1995,
and its cash flows for the nine months ended September 30, 1996 and 1995, and
the consolidated results of its operations for the three months and nine months
ended September 30, 1996 and 1995 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.
NOTE B - INVESTMENT SECURITIES
Investment securities consisted of the following at September 30, 1996:
Amortized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
---------- ---------- ---------- ----------
HELD TO MATURITY
U.S. Treasury and
Federal agencies $ 851,871 $ 1,495 $ 3,140 $ 850,226
========== ========== ========== ==========
AVAILABLE FOR SALE
U.S. Treasury and
Federal agencies $4,038,067 $ 9,142 $ 12,838 $4,034,371
State and political
subdivisions 1,467,976 6,099 7,539 1,466,536
Asset-backed securities 1,857,855 2,585 15,602 1,844,838
Other investments 492,320 5,044 646 496,718
---------- ---------- ---------- ----------
Total $7,856,218 $ 22,870 $ 36,625 $7,842,463
========== ========== ========== ==========
Investment securities consisted of the following at December 31, 1995:
Amortized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
---------- ---------- ---------- ----------
HELD TO MATURITY
U.S. Treasury and
Federal agencies $ 824,399 $ 5,217 $ 483 $ 829,133
========== ========== ========== ==========
AVAILABLE FOR SALE
U.S. Treasury and
Federal agencies $2,270,695 $ 17,579 $ 4,292 $2,283,982
State and political
subdivisions 1,299,720 10,411 3,898 1,306,233
Asset-backed securities 1,672,822 4,347 11,808 1,665,361
Other investments 271,028 10,050 1,290 279,788
---------- ---------- ---------- ----------
Total $5,514,265 $ 42,387 $ 21,288 $5,535,364
========== ========== ========== ==========
Held-to-maturity securities are reported at amortized cost, and
available-for-sale securities are reported at fair value on the statement of
condition.
During the nine months ended September 30, 1996, gains of $7,186,000 and losses
of $2,626,000 were realized on sales of available-for-sale securities of
$413,989,000. During the nine months ended September 30, 1995, gains of
$11,566,000 and losses of $5,663,000 were realized on sales of
available-for-sale securities of $3,252,304,000.
NOTE C - ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance for loan losses is based on State
Street's past loan loss experience, known and inherent risks in the portfolio,
current economic conditions and adverse situations that may affect the
borrowers' ability to repay, timing of future payments, estimated value of any
underlying collateral, and the performance of individual credits in relation to
contract terms and other relevant factors. The provision for loan losses charged
to earnings is based upon management's judgment of the amount necessary to
maintain the allowance at a level adequate to absorb probable losses.
Changes in the allowance for loan losses were as follows:
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Balance at beginning of period $ 70,088 $ 60,245 $ 63,491 $ 58,184
Provision for loan losses 2,000 2,001 6,001 6,001
Loan charge-offs (1,377) (415) (4,136) (4,232)
Recoveries 710 709 6,065 2,587
-------- -------- -------- --------
Balance at end of period $ 71,421 $ 62,540 $ 71,421 $ 62,540
======== ======== ======== ========
NOTE D - LONG-TERM DEBT
In April 1996, a shelf registration statement became effective that amends and
supplements a previous shelf registration that was effective in August 1993. The
amended shelf allows State Street to issue up to $500 million of unsecured debt
securities and/or shares of its preferred stock. In June 1996, State Street
issued $150 million of 7.35% Notes due 2026, redeemable at the option of the
holder in 2006. At September 30, 1996, $350 million of the shelf registration is
available for issuance.
NOTE E - INCOME TAXES
The provision for income taxes included in the Consolidated Statement of Income
is comprised of the following:
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Current $ 17,903 $ 5,235 $ 39,888 $ 42,550
Deferred 19,395 20,206 74,584 42,596
-------- -------- -------- --------
Total provision $ 37,298 $ 25,441 $114,472 $ 85,146
======== ======== ======== ========
Taxes were $37 million, up from $25 million a year ago when a retroactive
adjustment associated with a Massachusetts tax law change lowered the quarterly
effective tax rate by six percentage points to 28.2%. The effective tax rate for
the third quarter of 1996 was 33.6%, reflecting the current estimated 34.4%
annual rate.
NOTE F - FEE REVENUE - OTHER
The Other category of fee revenue consisted of the following:
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Foreign exchange trading $ 27,505 $ 36,374 $ 90,986 $109,590
Service fees 19,277 15,116 54,509 41,961
Processing service fees 11,348 10,978 33,067 43,613
Trading account profits 3,671 1,624 5,216 1,801
Securities gains, net 776 331 4,560 5,903
Other 2,779 4,944 17,051 19,437
-------- -------- -------- --------
Total fee revenue - other $ 65,356 $ 69,367 $205,389 $222,305
======== ======== ======== ========
NOTE G - OPERATING EXPENSES - OTHER
The Other category of operating expenses consisted of the following:
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Contract services $35,432 $31,147 $106,643 $ 87,614
Professional services 15,383 11,273 42,832 36,798
Advertising and sales promotion 7,980 6,942 25,679 19,600
Postage, forms and supplies 6,493 5,669 19,616 17,781
Telecommunications 5,484 5,536 17,589 17,667
Other 24,557 21,766 68,945 54,603
------- ------- -------- --------
TOTAL OPERATING
EXPENSES - OTHER $95,329 $82,333 $281,304 $234,063
======= ======= ======== ========
NOTE H - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
State Street uses various off-balance sheet financial instruments, including
derivatives, to satisfy the financing and risk management needs of customers, to
manage interest-rate and currency risk and to conduct trading activities.
Derivative instruments include forwards, futures, swaps, options and other
instruments with similar characteristics. These instruments generate fee,
interest or trading revenue. Associated with these instruments are market and
credit risks that could expose State Street to potential losses. State Street
also uses derivative financial instruments in trading and balance sheet
management activities.
The following table summarizes the contractual or notional amounts of
significant derivative financial instruments held or issued by State Street at:
September 30, December 31,
(Dollars in millions) 1996 1995
-------------- -------------
TRADING:
Interest rate contracts:
Swap agreements $ 821 $ 420
Options and caps purchased 25 25
Options and caps written 70 36
Futures sold 1,579 1,050
Options on futures written 820 800
Options on futures purchased 1,068 1,000
Foreign exchange contracts:
Forward, swap and spot 62,610 54,965
Options purchased 273 20
Options written 125 43
BALANCE SHEET MANAGEMENT:
Interest rate contracts:
Swap agreements 284 217
Options and caps purchased 50 50
Foreign exchange contracts:
Forward, swap and spot 22 --
The following table represents the fair value of financial instruments held or
issued for trading purposes as of:
September 30, December 31,
1996 1995
(Dollars in millions) ------------------------ ------------------------
Average Average
Fair Value Fair Value Fair Value Fair Value
---------- ---------- ---------- ----------
FOREIGN EXCHANGE CONTRACTS:
Contracts in a receivable position $501 $465 $539 $751
Contracts in a payable position 486 448 466 704
OTHER FINANCIAL INSTRUMENT CONTRACTS:
Contracts in a receivable position 9 8 4 2
Contracts in a payable position 8 6 3 3
The above amounts have been reduced by offsetting balances with the counterparty
where a master netting agreement exists. Contracts in a receivable position are
shown in Other Assets on the balance sheet and Contracts in a payable position
are shown in Other Liabilities.
Credit-related financial instruments include commitments to extend credit,
standby letters of credit, letters of credit and indemnified securities lent.
The maximum credit risk associated with credit-related financial instruments is
measured by the contractual amounts of these instruments. The following is a
summary of the contractual amount of State Street's credit-related, off-balance
sheet financial instruments:
September 30, December 31,
(Dollars in millions) 1996 1995
-------------- ------------
Loan commitments $ 4,735 $ 3,626
Standby letters of credit 1,725 1,286
Letters of credit 183 179
Indemnified securities lent 42,008 28,949
NOTE I - 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 assets under management that are held
or managed by State Street in a fiduciary or custody capacity, are not included
in the Consolidated Statement of Condition since the 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 September
30, 1996 that would have a material adverse effect on State Street's financial
position or results of operations.
State Street is subject to pending and threatened legal actions that arise in
the normal course of business. In the opinion of management, after discussion
with counsel, these can be successfully defended or resolved without a material
adverse effect on State Street's financial position or results of operations.
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 September 30, 1996, and the related consolidated
statements of income for the three-month and nine-month periods ended September
30, 1996 and 1995, and the consolidated statements of cash flows and changes in
stockholders' equity for the nine-month periods ended September 30, 1996 and
1995. 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, 1995, 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 10, 1996 we expressed an
unqualified opinion on those consolidated financial statements.
ERNST & YOUNG LLP
Boston, Massachusetts
October 11, 1996
STATE STREET BOSTON CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Earnings per fully diluted share were $.90, an increase of 17% from $.77 in the
third quarter of 1995. Net income was $74 million, up from $65 million a year
ago. Return on stockholder's equity was 18.3%, up from 16.9% in the third
quarter of 1995.
Condensed Income Statement
Taxable Equivalent Basis
(Dollars in millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- --------------------------
1996 1995 Change % 1996 1995 Change %
------ ------ ------ --- -------- --------- ------ ---
Fee revenue $324.3 $283.8 $ 40.5 14 $ 953.9 $ 822.2 $ 131.7 16
Interest revenue 378.0 352.6 25.4 7 1,085.0 1,017.2 67.8 7
Interest expense 229.9 232.3 (2.4) (1) 652.8 674.9 (22.1) (3)
------ ------ ------ -------- --------- --------
Net interest revenue 148.1 120.3 27.8 23 432.2 342.3 89.9 26
Provision for loan losses 2.0 2.0 - - 6.0 6.0 - -
------ ------ ------ -------- --------- --------
Net interest revenue after
provision for loan losses 146.1 118.3 27.8 23 426.2 336.3 89.9 27
------ ------ ------ -------- --------- --------
Total revenue 470.4 402.1 68.3 17 1,380.1 1,158.5 221.6 19
Operating expenses 350.0 300.7 49.3 16 1,022.7 864.7 158.0 18
------ ------ ------ -------- --------- --------
Income before taxes 120.4 101.4 19.0 19 357.4 293.8 63.6 22
Income taxes 37.3 25.4 11.9 47 114.5 85.1 29.4 35
Taxable equivalent adjustment 9.5 11.4 (1.9) (17) 28.0 27.1 .9 3
------ ------ ------ -------- --------- --------
Net income $ 73.6 $ 64.6 $ 9.0 14 $ 214.9 $ 181.6 $ 33.3 18
====== ====== ====== ======== ========= ========
Earnings Per Share
Primary $ .91 $ .78 $ .13 17 $ 2.63 $ 2.19 $ .44 20
Fully diluted .90 .77 .13 17 2.61 2.17 .44 20
($ and % change based on dollars in thousands, except per share data)
For the first nine months of 1996, earnings per share were $2.61, an increase of
20% from $2.17. Net income increased 18%, with revenue growth of 19% and expense
growth of 18%. Return on stockholders' equity was 18.1%.
Total Revenue
Total revenue for the quarter was $470 million, up $68 million, or 17%, from a
year ago due to strong growth in both fiduciary compensation and net interest
revenue.
For the nine month period ended September 30, 1996, total revenue was $1.4
billion, up $222 million, or 19%, from 1995.
Fee Revenue
Fee revenue, which comprised 69% of total revenue, was $324 million, up $40
million, or 14%, from the third quarter of 1995. Fiduciary compensation, the
largest component of fee revenue, is derived from accounting, custody,
recordkeeping, information, investment management and trustee services.
Fiduciary compensation was $259 million, up $44 million, or 21%, from a year ago
due to new business and expanded customer relationships against a backdrop of
increasing cross-border investments and favorable securities markets.
Revenue growth from investment management services, delivered through State
Street Global Advisors, occurred across the product line, with revenue from
managing international equities contributing significantly. At quarter end,
total assets under management were $280 billion, up 41% from a year ago. Revenue
from participant recordkeeping for defined contribution plans was up
substantially, reflecting additional customer volume and an acquisition.
In financial asset services, revenue grew from global custody and accounting for
customers outside the United States. Revenue from servicing mutual funds
reflected additional assets, particularly non-U.S. assets, and 175 new funds
since a year ago.
Service fees for the quarter were $19 million, up $4 million, or 28%, from the
same quarter a year ago due to strength in brokerage and loan fees.
Strength in fiduciary compensation and service fees was partially offset by
lower foreign exchange revenue. Foreign exchange revenue was $28 million, down
$9 million, or 24%, from the prior year due to less volatile foreign currency
markets.
For the nine month period ended September 30, 1996, fee revenue was $954
million, an increase of $132 million, or 16%, from 1995. Growth of $149 million
in fiduciary compensation was offset by a decrease of $19 million in foreign
exchange revenue, attributable to less volatile foreign currency markets, and a
decrease of $11 million in processing service fees, due primarily to the sale of
a credit card replacement business in the second quarter of 1995.
Net Interest Revenue
Taxable equivalent net interest revenue was $148 million, up $28 million, or
23%, from a year ago due to wider interest rate spreads and a $2.9 billion, or
12%, increase in average interest-earning assets. This balance sheet growth was
driven by an increase in foreign deposits and securities sold under repurchase
agreements from customers in conjunction with their investment activities.
Three Months Ended
September 30,
-------------------------------------------
1996 1995
------------------- -------------------
Average Average
(Dollars in millions) Balance Rate Balance Rate
------- ---- ------- ----
Interest-earning assets $26,472 5.68% $23,586 5.93%
Interest-bearing liabilities 22,268 4.11 19,537 4.72
---- ----
Excess of rates earned
over rates paid 1.57% 1.21%
==== ====
Net Interest Margin 2.23% 2.02%
==== ====
For the nine month period ended September 30, 1996, taxable equivalent net
interest revenue was $432 million, up $90 million, or 26%, from the same period
in 1995 due to wider interest rate spreads and a $3.0 billion, or 13%, increase
in average interest-earning assets, driven primarily by increased foreign
deposits.
Operating Expenses
Operating expenses of $350 million were up $49 million, or 16%, from a year ago.
Salaries and employee benefits were $194 million, up $29 million, or 18%, due to
additional staff, salary increases and incentive compensation. Other expenses
were $95 million, up $13 million, or 16%, due to higher subcustodian fees
reflecting growth in non-U.S. assets, use of additional outside consultants and
higher transactions costs associated with the U.S. securities industry change to
same day settlement of securities.
For the nine month period ended September 30, 1996, operating expenses were up
$158 million, or 18%, due primarily to higher performance-linked compensation
costs and additional staff to support business growth.
Credit Quality
At September 30, 1996, total loans were $4.3 billion, 15% of the balance sheet.
In the third quarter, the provision for loan losses charged against income was
$2 million, the same as a year ago. During the quarter, the allowance for loan
losses increased from $70 million to $71 million.
Loan Ratios 1996 1995
- ----------- ----------------------------- ----------------------------------
3Q 2Q 1Q 4Q 3Q 2Q 1Q
--------- -------- -------- ------- ------- ------- ------
Allowance to ending loans 1.68% 1.64% 1.56% 1.59% 1.70% 1.70% 1.82%
Net recoveries (charge-offs)
to average loans (.06) .22 .02 (.11) .03 (.13) (.10)
Non-performing loans to
ending loans .19 .24 .33 .39 .62 .75 .69
During the third quarter, non-performing loans decreased from $10 million to $8
million. Net charge-offs were $.7 million.
Taxes
Taxes were $37 million, up from $25 million a year ago when a retroactive
adjustment associated with a Massachusetts tax law change lowered the quarterly
effective tax rate by six percentage points to 28.2%. The effective tax rate for
the third quarter of 1996 was 33.6%, reflecting the current estimated 34.4%
annual rate.
Lines of Business
State Street reports three lines of business - Financial Asset Services,
Investment Management and Commercial Lending.
Financial Asset Services represents primarily custody-related services for large
pools of assets such as mutual funds and pension plans (both defined benefit and
defined contribution), and corporate trusteeship. Fiduciary compensation revenue
is derived from services related to State Street's $2.7 trillion of assets under
custody and $317 billion of bonds under trusteeship. In addition to fiduciary
compensation, certain financial asset services customers generate other types of
fee revenue, particularly foreign exchange trading revenue and net interest
revenue. Noninterest-bearing and foreign deposits from these customers comprise
a significant amount of State Street's total deposits available for investment.
These customers also invest substantial short-term funds with State Street.
Revenue from investing these deposits and funds is reported as interest revenue.
Investment Management is comprised of the business components that manage $280
billion of institutional and personal financial assets worldwide, and provide
participant recordkeeping services for defined contribution plans. Fee revenue
is derived from a broad array of products that focus on quantitative equity
management, both passive and active, and money market funds.
Commercial Lending services are provided to commercial and financial customers.
State Street's lending activities are focused on middle-market companies in the
northeastern United States, as well as specialized industries nationwide.
Line-of-business information is based on State Street's management accounting
practices and are not necessarily comparable with similar information for other
companies.
The following is a summary of line-of-business results for the nine months ended
September 30, 1996 and 1995. Certain previously reported line-of-business
information has been reclassified to conform to the current method of
presentation.
Financial Investment Commercial
(Taxable equivalent basis, Asset Services Management Lending
dollars in millions) ------------------- ---------------- ----------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
Fee revenue $ 691.1 $ 629.0 $ 229.2 $164.5 $ 33.6 $ 28.7
Net interest revenue 301.5 223.0 17.9 15.8 112.8 103.5
Provision for loan losses .5 .5 5.5 5.5
------- -------- ------- ------ ------ -------
Total revenue 992.1 851.5 247.1 180.3 140.9 126.7
Operating expenses 765.2 674.1 194.2 134.1 63.3 56.5
------- -------- ------- ------ ------ -------
Operating profit 226.9 177.4 52.9 46.2 77.6 70.2
======= ======== ======= ====== ====== =======
Average Assets $25,790 $ 23,200 $ 39 $ 19 $3,133 $ 2,677
Further understanding of line-of-business results can be ascertained from
information on fee revenue and net interest revenue, as discussed in earlier
sections describing the operations of State Street. The significant revenue and
operating expense items applicable to the respective lines of business are
provided below.
Financial Asset Services contributed $227 million to operating profit for the
first nine months of 1996. This was an increase of $50 million, or 28%, from the
same period a year ago, due to strong revenue growth in both net interest
revenue and fee revenue. Total revenue increased $141 million, or 17%, to $992
million. Net interest revenue increased $79 million, or 35%, due to wider
interest rate spreads and an increase in average interest-earning assets. Fee
revenue increased $62 million, or 10%, due to fiduciary compensation growth,
offset by a decline in foreign exchange revenue and lower processing service
fees. Operating expenses increased $91 million, or 14%, from the same period a
year ago primarily due to additional staff to support business growth.
Investment Management contributed $53 million to operating profit for the first
nine months of 1996. This was an increase of $7 million, or 15%, from the same
period a year ago. Revenue grew $67 million, or 37%, due to strong business
growth in investment management services and participant recordkeeping for
defined contribution plans. Operating expenses increased $60 million, or 45%,
from the same period a year ago due to additional staff and higher
performance-linked compensation costs.
Commercial Lending contributed $78 million to operating profit for the first
nine months of 1996. This was an increase of $7 million, or 11%, from the same
period a year ago reflecting loan growth in middle market lending, foreign
loans, and leases.
Accounting Changes
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" was
adopted by State Street effective January 1, 1996. SFAS No. 121 addresses how
long-lived assets and certain identifiable intangibles held and used should be
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The adoption of
SFAS No. 121 did not have a material impact on the financial statements of State
Street.
SFAS No. 122, "Accounting for Mortgage Servicing Rights" was adopted by State
Street effective January 1, 1996. SFAS 122 requires institutions to recognize
rights to service mortgage loans for others as separate assets, regardless of
how the servicing rights are acquired. In addition, SFAS No. 122 addresses how
mortgage servicing rights are to be assessed for impairment based on their fair
value. Prior to January 1, 1996, mortgage servicing rights were recorded at
acquisition cost. The adoption of SFAS No. 122 did not have a material impact on
the financial statements of State Street.
In 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued.
This statement addresses financial accounting and reporting standards for
stock-based employee compensation plans. State Street plans to continue to
measure compensation cost for these plans using the intrinsic value based method
of accounting prescribed by APB opinion No. 25 and will adopt the new disclosure
requirements for the year ended December 31, 1996.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued. This statement provides
standards for transfers and servicing of financial assets and extinguishing
liabilities. Certain provisions of this statement are effective for fiscal years
beginning after December 31, 1996. State Street will adopt the required
provisions of this new statement in 1997.
Capital and Liquidity
State Street maintains strong capital levels and continues to generate capital
internally. In the third quarter, the internal capital generation rate was
14.5%.
State Street's capital and leverage ratios exceeded the regulatory guidelines as
follows:
Minimum
September 30, December 31, Regulatory
(Dollars in millions) 1996 1995 Guidelines
------------- ------------ ----------
Risk-based capital ratios:
Tier 1 capital 12.5% 14.0% 4.0%
Total capital 13.0 14.5 8.0
Leverage ratio 5.3 5.6 3.0
Tier 1 capital $ 1,555 $ 1,507
Total capital 1,613 1,563
Risk-adjusted assets:
On-balance sheet assets $ 9,494 $ 8,409
Off-balance sheet assets 2,924 2,339
-------- -------
Total risk-adjusted assets $ 12,418 $10,748
======== ========
State Street intends to maintain capital ratios at State Street Bank which
qualify for the "well-capitalized" designation, including a leverage ratio of 5%
or more. The Corporation's objectives are to optimize the use of the balance
sheet, maximizing return within risk parameters, and to meet the needs of its
customers, with emphasis on those services which State Street is well positioned
to provide.
The primary objective of State Street's liquidity management is to ensure that
State Street has sufficient funds to repay maturing liabilities, accommodate the
transaction and cash management requirements of its customers, meet loan
commitments, and accommodate other corporate needs. Liquidity is provided by
State Street's access to global market sources of funding, and the ability to
gather additional deposits, maturing short-term assets, the sale of
available-for-sale securities, and payments of loans.
State Street manages its assets and liabilities to maintain a high level of
liquidity. It has an extensive and diverse funding base inside and outside the
United States. Nearly all of its funding comes from customers who have other
relationships with State Street, particularly those using custody services
worldwide. Deposits are available through both domestic and international
treasury centers, providing a cost-effective, multicurrency,
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 September 30,
1996, the portfolio included $6.2 billion of interest-bearing deposits with
banks, $3.9 billion of securities purchased under resale agreements and
securities borrowed, and $1.9 billion of Federal funds sold. Of the total $12
billion in liquid assets, $6.2 billion mature within one week, and nearly all
mature within nine months . Although not relied on for daily liquidity needs,
the $7.8 billion available-for-sale-portfolio of investment 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, and securities borrowed, trading account assets and
investment securities. At September 30, 1996, State Street's liquid assets were
79% of total assets.
Foreign Exchange And Derivative Financial Instruments
State Street uses foreign exchange and other financial derivative instruments to
support customers' needs, conduct trading activities, and manage interest rate
and currency risks. These activities either generate trading revenue or enhance
the stability of net interest revenue. In addition, State Street provides
services related to derivative instruments in its role as both a manager and
servicer of financial assets.
As a part of trading activities, State Street manages trading positions in both
the foreign exchange and interest-rate markets using financial derivatives -
primarily forward foreign exchange contracts, foreign exchange and interest-rate
options, and interest-rate swaps. State Street's positions are based on market
expectations and customers' needs. As of September 30, 1996, the notional amount
of these instruments was approximately $67 billion of which $63 billion was
foreign exchange forward, swap and spot contracts.
Trading activities involving foreign exchange and/or interest-rate derivatives
are managed using earnings at risk measures and trading limits as established by
risk- management policies. Interest-rate and foreign exchange derivatives that
are used as part of the asset-and liability-management process are subjected to
the same credit and interest-rate risk processes for financial instruments
carried on the balance sheet.
As a manager of financial assets for others, State Street uses derivative
financial instruments to hedge against market risk, adjust portfolio duration
and enable efficient portfolio construction. These activities are undertaken in
accordance with investment guidelines supplied by, or disclosed to, State
Street's customers. As a servicer of financial assets, State Street acts as
trustee, custodian and/or administrator for its customers' investment funds,
certain of which may use derivative instruments in their investment strategies.
These activities are part of the normal responsibilities of State Street as a
service provider and are discharged in accordance with customer service
contracts.
Stock Purchase Program
During the quarter, the Corporation purchased 400,000 shares of its stock. At
quarter end, a total of three million shares had been purchased under the
current six million share purchase program.
Acquisition
In line with State Street's business strategy of making acquisitions to enhance
product capabilities, on October 17, 1996, State Street executed an agreement to
acquire Princeton Financial Systems, Inc., a leading provider of services and
client/server software products to the insurance and investment management
industry. The acquisition, which is expected to be completed in the fourth
quarter, offers opportunities to provide additional services for the insurance
industry and to expand the range of services State Street offers its customers.
Outlook, Financial Goals And Factors Which May Affect Them
OUTLOOK. In the third quarter State Street achieved a record pace of new
business wins, as measured by estimated annual revenue. These new customers will
be installed over the coming five quarters. State Street is moving to
participate in the pre-trade and trade segments of the investment cycle,
augmenting its expertise in the post-trade process. State Street's financial
performance in the third quarter exceeded its financial goals for both the
quarter and the year-to-date.
FINANCIAL GOALS. State Street's primary annual financial goal is sustainable
real growth in earnings per share. There are two supporting annual goals, one
for revenue and one for return on stockholders' equity. The revenue goal is to
repeat in the decade of the 1990s what was accomplished in the 1980s, which was
12 1/2% real, or inflation adjusted, growth in revenue per year for the decade.
The return on equity goal is an 18% return on stockholders' equity.
State street considers these to be financial goals, not projections or forward
looking statements. However, if these goals or forward looking elements are
perceived to be forward looking statements, they should be considered in
conjunction with the factors listed below, which may materially impact State
Street's ability to achieve these goals.
FACTORS. The following issues and factors, which were previously discussed in
the 1995 Annual Report and Form 10-K, among other issues and factors, should be
considered in evaluating the goals and forward looking statements.
Cross-border investing. Cross-border investing by both U.S. and non-U.S.
customers benefits revenue. Future revenue may increase or decrease depending
upon the cross-border investment decisions made by customers or future
customers.
Savings rate of individuals. State Street may benefit from increased savings of
individuals if those savings are invested in mutual funds and/or defined
contribution plans.
Size and value of worldwide financial markets. As worldwide financial markets
increase or decrease in size, State Street's opportunity to invest and/or
service financial assets changes. Since a portion of State Street's fees are
based on the value of assets under custody and management, the fluctuations in
worldwide securities market valuations affect revenue.
Dynamics of markets served. Changes in the markets served can affect revenue,
including the growth rate of U.S. mutual funds, the pace of debt issuance, and
mergers, acquisitions and consolidations among customers.
Interest rates. Market interest rate levels, the direction of interest rate
changes and spreads affect both net interest revenue and fiduciary compensation
from securities lending. All else being equal, State Street benefits from higher
rather than lower interest rates because it can invest its non-interest bearing
deposits and equity in higher interest-earning assets. State Street also
benefits from falling interest rates. Wider market interest rate spreads enable
State Street to earn more net interest revenue from its deposits and other
funding and from fiduciary compensation generated by securities lending.
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/or investment management services.
Pricing/competition. Future prices the company is able to obtain for its
products may decrease from current levels depending upon the market and cost
factors. Substitute products could render State Street's products less desirable
or State Street could produce products on which it has increased pricing power.
Pace of new business. The pace at which existing and new customers use new
services will affect future revenue.
Business mix. Changes in business mix, including the mix of U.S. and non-U.S.
business, will affect earnings growth rates.
Rate of technological change. Technological change creates opportunities for
product differentiation and reduced costs as well as the possibility of
increased expenses.
Based on its evaluation of these factors, management is optimistic about the
company's long-term prospects.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning legal proceedings appears in Note I to the Consolidated
Financial Statements on Page 11 of this report, and such information is
incorporated herein by reference.
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
-------------------
10 State Street Global Advisors Equity Compensation Plan 24
11 Statement re computation of per share earnings 29
12 Ratio of Earnings to Fixed Charges 30
15 Letter re: unaudited interim financial information 31
27 Financial data schedule -
(b)Reports on Form 8-K
None
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: November 12, 1996 By: /s/ Ronald L. O'Kelley
---------------------------------------------------
Ronald L. O'Kelley
Executive Vice President and Chief Financial Officer
Date: November 12, 1996 By: /s/ Rex S. Schuette
---------------------------------------------------
Rex S. Schuette
Senior Vice President and Comptroller