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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-5108
State Street Corporation
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2456637
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
225 Franklin Street
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 July 31, 1997 was 160,587,480.
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STATE STREET CORPORATION
Table of Contents
Page
PART I. FINANCIAL INFORMATION .........
- ------------------------------
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 - 12
Independent Accountants' Review Report.............................. 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 14 - 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.. 21-22
Item 5. Other Information.................................... 22
Item 6. Exhibits and Reports on Form 8-K..................... 22
Signatures.......................................................... 23
Exhibits ........................................................... 24 - 43
PART I. ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME - STATE STREET CORPORATION (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data) Three months ended June 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
FEE REVENUE
Fiduciary compensation................................................................. $ 308 $ 256
Foreign exchange trading............................................................... 50 30
Servicing and processing .............................................................. 39 29
Other 7 8
--------- ---------
Total fee revenue................................................................ 404 323
NET INTEREST REVENUE
Interest revenue....................................................................... 425 342
Interest expense....................................................................... 271 208
--------- ---------
Net interest revenue............................................................. 154 134
Provision for loan losses.............................................................. 3 2
--------- ---------
Net interest revenue after provision for loan losses............................. 151 132
--------- ---------
TOTAL REVENUE.................................................................... 555 455
OPERATING EXPENSES
Salaries and employee benefits......................................................... 235 189
Transaction processing services........................................................ 46 42
Equipment.............................................................................. 38 35
Occupancy.............................................................................. 29 25
Other 71 54
--------- ---------
Total operating expenses......................................................... 419 345
--------- ---------
Income before income taxes....................................................... 136 110
Income taxes........................................................................... 44 39
--------- ---------
NET INCOME....................................................................... $ 92 $ 71
========= =========
EARNINGS PER SHARE
Primary.......................................................................... $ .57 $ .44
Fully diluted.................................................................... .56 .44
AVERAGE SHARES OUTSTANDING (in thousands)
Primary.......................................................................... 162,291 163,118
Fully diluted.................................................................... 163,452 164,251
CASH DIVIDENDS DECLARED PER SHARE...................................................... $ .11 $ .095
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- -------------------------------------------------------------------------------
PART I. ITEM 1.
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENT OF INCOME - STATE STREET CORPORATION (UNAUDITED)
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(Dollars in millions, except per share data) Six months ended June 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
FEE REVENUE
Fiduciary compensation................................................................. $ 594 $ 490
Foreign exchange trading............................................................... 96 63
Servicing and processing .............................................................. 79 57
Other 9 20
-------- ---------
Total fee revenue................................................................ 778 630
NET INTEREST REVENUE
Interest revenue....................................................................... 823 688
Interest expense....................................................................... 519 423
-------- ---------
Net interest revenue............................................................. 304 265
Provision for loan losses.............................................................. 6 4
-------- ---------
Net interest revenue after provision for loan losses............................. 298 261
-------- ---------
TOTAL REVENUE.................................................................... 1,076 891
OPERATING EXPENSES
Salaries and employee benefits......................................................... 454 370
Transaction processing services........................................................ 90 79
Equipment.............................................................................. 77 67
Occupancy.............................................................................. 57 50
Other 132 107
-------- ---------
Total operating expenses......................................................... 810 673
-------- ---------
Income before income taxes....................................................... 266 218
Income taxes........................................................................... 88 77
-------- ---------
NET INCOME....................................................................... $ 178 $ 141
======== =========
EARNINGS PER SHARE
Primary.......................................................................... $ 1.10 $ .86
Fully diluted.................................................................... 1.09 .86
AVERAGE SHARES OUTSTANDING (in thousands)
Primary.......................................................................... 162,693 163,823
Fully diluted.................................................................... 163,838 165,037
CASH DIVIDENDS DECLARED PER SHARE...................................................... $ .21 $ .185
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CONDITION - STATE STREET CORPORATION
- --------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
JUNE 30, December 31,
(Dollars in millions) 1997 1996
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ASSETS
Cash and due from banks............................................................ $ 1,989 $ 1,623
Interest-bearing deposits with banks............................................... 8,776 7,565
Securities purchased under resale agreements and securities borrowed............... 3,555 4,613
Federal funds sold................................................................. 3,047 1,155
Trading account assets............................................................. 126 255
Investment securities (principally available for sale) ............................ 10,594 9,387
Loans (less allowance of $74 and $73).............................................. 5,453 4,640
Premises and equipment............................................................. 465 468
Customers' acceptance liability.................................................... 99 35
Accrued income receivable.......................................................... 490 442
Other assets....................................................................... 2,092 1,341
-------- --------
TOTAL ASSETS................................................................. $ 36,686 $ 31,524
======== ========
LIABILITIES
Deposits:
Noninterest-bearing................................................................ $ 9,036 $ 6,395
Interest-bearing:
Domestic........................................................................ 2,148 2,071
Non-U.S......................................................................... 13,674 11,053
-------- --------
Total deposits............................................................... 24,858 19,519
Securities sold under repurchase agreements........................................ 6,625 7,387
Federal funds purchased ........................................................... 152 117
Other short-term borrowings........................................................ 514 649
Notes payable...................................................................... 87 86
Acceptances outstanding............................................................ 100 35
Accrued taxes and other expenses................................................... 730 657
Other liabilities.................................................................. 1,013 823
Long-term debt..................................................................... 775 476
-------- --------
TOTAL LIABILITIES............................................................ 34,854 29,749
STOCKHOLDERS' EQUITY
Preferred stock, no par: authorized 3,500,000; issued none......................... - -
Common stock, $1 par: authorized 250,000,000;
issued 167,424,000 and 83,615,000............................................ 167 84
Surplus............................................................................ 102 105
Retained earnings.................................................................. 1,751 1,694
Net unrealized gain on available-for-sale securities............................... 10 12
Treasury stock, at cost (6,850,000 and 2,461,000 shares)........................... (198) (120)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................................... 1,832 1,775
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 36,686 $ 31,524
======== ========
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The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS - STATE STREET CORPORATION (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Six months ended June 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income ................................................................................ $ 178 $ 141
Noncash charges for depreciation, amortization, provision for loan losses and
deferred income taxes ................................................................... 140 135
-------- --------
Net income adjusted for noncash charges.............................................. 318 276
Adjustments to reconcile to net cash (used) provided by operating activities:
Securities gains, net................................................................ - (3)
Net change in:
Trading account assets.......................................................... 129 248
Other, net...................................................................... (606) (199)
-------- --------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES........................... (159) 322
-------- --------
INVESTING ACTIVITIES Payments for purchases of:
Available-for-sale securities........................................................ (2,706) (4,032)
Held-to-maturity securities.......................................................... (441) (545)
Lease financing assets............................................................... (1,093) (378)
Premises and equipment............................................................... (56) (46)
Proceeds from:
Maturities of available-for-sale securities.......................................... 1,335 1,720
Maturities of held-to-maturity securities............................................ 424 529
Sales of available-for-sale securities............................................... 173 192
Principal collected from lease financing............................................. 39 42
Net (payments for) proceeds from:
Interest-bearing deposits with banks................................................. (1,211) (1,784)
Federal funds sold, resale agreements and securities borrowed........................ (834) 1,509
Loans................................................................................ (548) (174)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES...................................... (4,918) (2,967)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of:
Long-term debt....................................................................... 300 150
Nonrecourse debt for lease financing................................................. 878 281
Notes payable........................................................................ 1 177
Treasury stock....................................................................... 3 6
Payments for:
Maturity of notes payable............................................................ - (188)
Nonrecourse debt for lease financing................................................. (92) (49)
Long-term debt....................................................................... (1) (1)
Cash dividends....................................................................... (34) (30)
Purchase of common stock............................................................. (89) (102)
Net proceeds from (payments for):
Deposits............................................................................. 5,339 2,700
Short-term borrowings................................................................ (862) 116
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 5,443 3,060
-------- --------
NET INCREASE............................................................... 366 415
Cash and due from banks at beginning of period............................................. 1,623 1,422
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD................................... $ 1,989 $ 1,837
======== ========
SUPPLEMENTAL DISCLOSURE
Interest paid........................................................................ $ 587 $ 413
Income taxes paid.................................................................... 45 56
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The accompanying notes are in integral part of these financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - STATE STREET CORPORATION (UNAUDITED)
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(Dollars in millions, except per share data) Six months ended June 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of period.............................................................. $ 84 $ 83
Stock dividend, two-for-one split........................................................... 83 -
-------- -------
Balance at end of period.............................................................. 167 83
-------- -------
SURPLUS
Balance at beginning of period.............................................................. 105 40
Treasury stock issued....................................................................... (3) (3)
-------- -------
Balance at end of period.............................................................. 102 37
-------- -------
RETAINED EARNINGS
Balance at beginning of period.............................................................. 1,694 1,465
Net Income.................................................................................. 178 141
Stock dividend, two-for-one split........................................................... (83) -
Cash dividends declared ($.21 and $.185 per share).......................................... (34) (30)
Currency translation........................................................................ (4) (2)
-------- -------
Balance at end of period.............................................................. 1,751 1,574
-------- -------
NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES
Balance at beginning of period.............................................................. 12 13
Changes in unrealized gain (loss)........................................................... (2) (29)
-------- -------
Balance at end of period.............................................................. 10 (16)
-------- -------
TREASURY STOCK, AT COST
Balance at beginning of period.............................................................. (120) (13)
Common stock acquired (2,359,200 and 4,367,800 shares)..................................... (89) (102)
Treasury stock issued (430,262 and 629,478 shares).......................................... 11 13
-------- -------
Balance at end of period.............................................................. (198) (102)
-------- -------
TOTAL STOCKHOLDERS' EQUITY............................................................ $ 1,832 $ 1,576
======= =======
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The accompanying notes are in integral part of these financial statements.
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PART I. ITEM 1.
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
STATE STREET CORPORATION (UNAUDITED)
Note A - Basis of Presentation
State Street Corporation ("State Street,"), formerly State Street Boston
Corporation, is a financial services corporation and provides banking, trust,
investment management, global custody, administration and securities processing
services to both U.S. and non-U.S. customers. State Street reports three lines
of business: Financial Asset Services, Investment Management, and Commercial
Lending. Financial Asset Services provides global custody, accounting,
administration, foreign exchange, treasury, cash management, transaction
settlement and clearing, securities lending, and other services for investors
with large pools of investment assets worldwide such as mutual funds and pension
plans; and corporate trusteeship. Investment Management is comprised of the
business components that manage financial assets worldwide, for both
institutional and individuals, and provides related participant recordkeeping
for defined contribution plans. Commercial Lending activities include loans,
credit facilities and other banking services for regional middle-market
companies, for nationwide companies in selected industries and for
broker/dealers. Other credit facilities include asset-based finance, leasing and
international trade finance.
The consolidated financial statements include the accounts of State Street and
its subsidiary, State Street Bank and Trust Company ("State Street Bank," "the
Bank"). The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. All significant intercompany balances and transactions have been
eliminated upon consolidation. The results of operations of businesses purchased
are included from the date of acquisition. Investments in 50%-owned affiliates
are accounted for by the equity method. 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 six months ended June 30, 1997 and 1996, long-term debt
converted into common stock was $35,000 and $30,000, respectively.
In June 1996, Statement of Financial Accounting Standard ("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 adopted the required provisions of this new statement in
1997, and the provisions did not have a material impact on the financial
statements.
In February 1997, SFAS No. 128, "Earnings per Share" was issued and is required
to be adopted as of December 31, 1997. This statement requires a change in the
method currently used to compute earnings per share and requires a restatement
of all prior period earnings per share amounts. Under SFAS No. 128, primary
earnings per share is replaced by basic earnings per share. Basic earnings per
share excludes the dilutive effect of stock options from the calculation.
Computing earnings per share in accordance with the provisions of this statement
for the three months ended June 30, 1997 and 1996 would have resulted in basic
earnings per share of $.57 and $.44, respectively, and diluted earnings per
share of $.56 and $.44, respectively. Computing earnings per share in accordance
with the provisions of this statement for the six months ended June 30, 1997 and
1996 would have resulted in basic earnings per share of $1.11 and $.87,
respectively, and diluted earnings per share of $1.09 and $.86, respectively.
In February 1997, SFAS No. 129, "Disclosure of Information about Capital
Structure" was issued, which will be effective for 1997 financial statements.
State Street's current disclosures comply with the provisions of this statement.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. This
statement establishes standards for reporting comprehensive income and its
components and requires this disclosure be added as a new section in a financial
statement. This statement is effective for fiscal years beginning after December
31, 1997. State Street will adopt SFAS No. 130 for the year beginning January 1,
1998.
In June 1997, SFAS. No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. This statement establishes standards for
reporting information about operating segments in annual and interim financial
statements. This statement is effective for annual periods beginning after
December 15, 1997, and for interim periods beginning after December 15, 1998.
State Street will adopt SFAS No. 131 for the year ending December 31, 1998, and
for interim periods beginning January 1, 1999.
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, 1997 and December 31, 1996, and its
cash flows and consolidated results of its operations for the three months and
six months ended June 30, 1997 and 1996, 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
Available-for-sale securities are recorded at fair value and held-to-maturity
securities are recorded at amortized cost on the Consolidated Statement of
Condition. Investment securities consisted of the following as of the dates
indicated:
- -------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1997 December 31, 1996
AMORTIZED UNREALIZED FAIR Amortized Unrealized Fair
(Dollars in millions) COST GAINS LOSSES VALUE Cost Gains Losses Value
- ---------------------------------------------------------------------------------------- -----------------------------------
Available for sale (at fair value):
U.S. Treasury and Federal agencies............ $ 5,261 $ 15 $ 8 $ 5,268 $ 4,630 $ 18 $ 5 $ 4,643
State and political subdivisions.............. 1,687 10 5 1,692 1,557 10 8 1,559
Asset-backed securities....................... 1,505 2 1 1,506 1,198 3 1 1,200
Collateralized mortgage obligations........... 583 1 8 576 638 1 8 631
Other investments............................. 663 12 - 675 485 12 2 495
------- ---- ---- ------- ------- ---- ----- -------
Total............................................. $ 9,699 $ 40 $ 22 $ 9,717 $ 8,508 $ 44 $ 24 $ 8,528
======= ==== ==== ======= ======= ==== ==== =======
Held to maturity (at amortized cost):
U.S. Treasury and Federal agencies............ $ 877 $ 1 $ 1 $ 877 $ 859 $ 2 $ 2 $ 859
======= ==== ==== ======= ======= ==== ==== =======
- ---------------------------------------------------------------------------------------------------------------------------------
During the six months ended June 30, 1997, there were less than $1 million of
gains and losses realized on sales of available-for-sale securities of $173
million. During the six months ended June 30, 1996, gains of $6 million and
losses of $3 million were realized on sales of available-for-sale securities of
$192 million.
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 Six Months Ended
June 30, June 30,
(Dollars in millions) 1997 1996 1997 1996
- -------------------------------------------------------------------------------
Balance at beginning of period....... $ 70 $ 66 $ 73 $ 63
Provision for loan losses............ 3 2 6 4
Loan charge-offs..................... - (3) (6) (3)
Recoveries........................... 1 5 1 6
---- ---- ---- ----
Balance at end of period....... $ 74 $ 70 $ 74 $ 70
==== ==== ==== ====
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Note D - Long-Term Debt
On March 11, 1997, State Street completed the sale of $300 million of 8.035%
Capital Securities, Series A (the "Capital Securities"), due 2027, issued by
State Street Institutional Capital B (the "Trust"), a newly created subsidiary
business trust of State Street. The Capital Securities are guaranteed by State
Street. In connection with the sale of the Capital Securities, State Street
issued and sold to the Trust $309 million of its 8.035% Junior Subordinated
Deferrable Interest Debentures, Series B. At June 30, 1997, a total of $500
million of capital securities is included in long-term debt.
Note E - Stockholders' Equity
The authorized number of common shares increased from 112 million at December
31, 1996 to 250 million at June 30, 1997. On May 28, 1997, State Street
distributed a two-for-one stock split in the form of a 100% stock dividend to
shareholders of record on April 30, 1997. The par value of these additional
shares was capitalized by a transfer from retained earnings to common stock.
Earnings per share data have been restated for the stock split.
Note F - Regulatory Matters
The regulatory capital amounts and ratios were the following at June 30, 1997
and December 31, 1996:
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Regulatory Guidelines
------------------------------ State Street State Street Bank
Well --------------------------- --------------------------
(Dollars in millions) Minimum Capitalized 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-based ratios:
Tier 1 capital................... 4% 6% 13.0% 13.4% 11.0% 12.1%
Total capital.................... 8 10 13.1 13.6 11.3 11.9
Leverage ratio....................... 3 5 6.2 5.9 5.3 5.3
Tier 1 capital....................... $ 2,098 $ 1,818 $ 1,772 $ 1,632
Total capital........................ 2,117 1,847 1,817 1,611
Risk-based assets:
On-balance sheet................. $ 12,799 $ 10,311 $ 12,654 $ 10,234
Off-balance sheet................ 3,387 3,249 3,387 3,249
-------- -------- -------- --------
Total risk-based assets...... $ 16,186 $ 13,560 $ 16,041 $ 13,483
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
The regulatory designation of "well capitalized" under the prompt corrective
action regulations is not applicable to bank holding companies (State Street).
Regulation Y defines "well capitalized" for bank holding companies (State
Street) for the purpose of determining eligibility for a streamlined review
process for acquisition proposals. For such proposals, "well capitalized"
requires only a minimum tier 1 risk-based capital ratio of 6% and a minimum
total risk-based capital ratio of 10%.
Note G - Net Interest Revenue
Net interest revenue consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST REVENUE
Deposits with banks .................................................................... $ 94 $ 84 $184 $172
Investment securities:
U.S Treasury and Federal agencies .................................................. 92 63 178 111
State and political subdivisions (exempt from Federal tax) .......................... 20 18 38 32
Other investments ................................................................... 41 31 77 58
Loans .................................................................................. 82 68 158 133
Securities purchased under resale agreements, securities borrowed
and Federal funds sold .............................................................. 94 74 183 174
Trading account assets ................................................................. 2 4 5 8
---- ---- ---- ----
Total interest revenue ........................................................... 425 342 823 688
---- ---- ---- ----
INTEREST EXPENSE
Deposits ............................................................................... 119 104 228 215
Other borrowings ....................................................................... 137 102 266 203
Long-term debt ......................................................................... 15 2 25 5
---- ---- ---- ----
Total interest expense ........................................................... 271 208 519 423
---- ---- ---- ----
Net interest revenue ............................................................. $154 $134 $304 $265
==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------------------
Note H - Operating Expenses - Other
The other category of operating expenses consisted of the following:
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Professional services .................................................................. $ 21 $ 15 $ 37 $ 27
Advertising and sales promotion ........................................................ 13 9 24 18
Postage, forms and supplies ............................................................ 7 6 13 13
Telecommunications ..................................................................... 7 6 13 12
Other .................................................................................. 23 18 45 37
---- ---- ---- ----
Total operating expenses - other ................................................. $ 71 $ 54 $132 $107
==== ==== ==== ====
- -----------------------------------------------------------------------------------------------------------------------------------
Note I - 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
June 30, June 30,
(Dollars in millions) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Current ................................................................................ $ 12 $ 11 $ 24 $ 22
Deferred ............................................................................... 32 28 64 55
==== ==== ==== ====
Total provision .................................................................. $ 44 $ 39 $ 88 $ 77
==== ==== ==== ====
- -----------------------------------------------------------------------------------------------------------------------------------
Taxes were $44 million and $88 million for the three months and six months ended
June 30, 1997, respectively, up from $39 million and $77 million, respectively,
a year ago. The effective tax rates for the three months and six months ended
June 30, 1997, were 32.5% and 33.0%, respectively, down from 35.3% in the three
months and six months ended June 30, 1996.
Note J - Commitments and Contingent Liabilities
State Street provides banking, trust, investment management, global custody,
accounting, administration and securities processing services to both U.S. and
non-U.S customers. Assets under custody and assets under management, held or
managed by State Street in a fiduciary or custodial capacity, are not included
in the Consolidated Statement of Condition because such items are not assets of
State Street. Management conducts regular reviews of its responsibilities of
these services and considers the results in preparing its financial statements.
In the opinion of management, there are no contingent liabilities at June 30,
1997 that would have a material adverse effect on State Street's financial
position or results of operations.
State Street is subject to pending and threatened legal actions that arise in
the normal course of business. In the opinion of management, after discussion
with counsel, these can be successfully defended or resolved without a material
adverse effect on State Street's financial position or results of operations.
Note K - Off-Balance Sheet Financial Instruments, Including Derivatives
State Street uses various off-balance sheet financial instruments, including
derivatives, to satisfy the financing and risk management needs of customers, to
manage interest rate and currency risk and to conduct trading activities. In
general terms, derivative instruments are contracts or agreements whose value
can be derived from interest rates, currency exchange rates and/or other
financial indices. Derivative instruments include forwards, futures, swaps,
options and other instruments with similar characteristics. The use of these
instruments 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 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 as
of:
- ------------------------------------------------------------------------------
JUNE 30, December 31,
(Dollars in millions) 1997 1996
- ------------------------------------------------------------------------------
Trading:
Interest rate contracts:
Swap agreements...................... $ 1,070 $ 880
Options and caps purchased........... 45 25
Options and caps written............. 142 116
Futures - short position............. 1,225 1,252
Options on futures purchased......... 20 430
Options on futures written........... 14 28
Foreign exchange contracts:
Forward, swap and spot............... 96,059 62,109
Options purchased.................... 183 206
Options written...................... 6 60
Options on futures purchased......... 287 330
Balance Sheet Management :
Interest rate contracts:
Swap agreements................. 470 296
Options and caps purchased...... 50 50
Foreign exchange contracts:
Forward, swap and spot.......... 85 65
- -----------------------------------------------------------------------------
The following table represents the fair value of financial instruments held or
issued for trading purposes as of:
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1997 December 31, 1996
----------------------- -------------------------
AVERAGE Average
FAIR FAIR Fair Fair
(Dollars in millions) VALUE VALUE Value Value
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign exchange contracts:
Contracts in a receivable position ................................. $791 $892 $620 $615
Contracts in a payable position .................................... 756 875 634 617
Other financial instrument contracts:
Contracts in a receivable position ................................. 7 7 6 6
Contracts in a payable position .................................... 4 4 4 4
- ---------------------------------------------------------------------------------------------------------------------------------
The preceding 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 as of:
- ---------------------------------------------------------------------------
JUNE 30, December 31,
(Dollars in millions) 1997 1996
- ---------------------------------------------------------------------------
Indemnified securities on loan........... $ 57,464 $ 41,518
Loan commitments......................... 6,002 4,974
Standby letters of credit................ 1,660 1,777
Letters of credit........................ 255 160
- ---------------------------------------------------------------------------
On behalf of its customers, State Street lends their securities to creditworthy
brokers and other institutions. In certain circumstances, State Street may
indemnify its customers for the fair market value of those securities against a
failure of the borrower to return such securities. State Street requires the
borrowers to provide collateral in an amount equal to or in excess of the fair
market value of the securities borrowed. The borrowed securities are revalued
daily to determine if the additional collateral is necessary. State Street held
as collateral, cash and U.S. Government securities totaling $59.8 billion and
$42.8 billion for indemnified securities on loan at June 30, 1997 and December
31, 1996, respectively.
Loan and letter-of-credit commitments are subject to the same credit policies
and reviews as loans on the balance sheet. Collateral, both the amount and
nature, is obtained based upon management's assessment of the credit risk.
Approximately 70% of the loan commitments expire in one year or less from the
date of issue. Since many of the extensions of credit are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Independent Accountants' Review Report
The Stockholders and Board of Directors
State Street Corporation
We have reviewed the accompanying consolidated statement of condition of State
Street Corporation as of June 30, 1997, and the related consolidated statements
of income for the three-month and six-month periods ended June 30, 1997 and
1996, and the statements of cash flows and changes in stockholders' equity for
the six-month periods ended June 30, 1997 and 1996. These financial statements
are the responsibility of State Street's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with 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 Corporation
as of December 31, 1996 (presented herein), and the related consolidated
statements of income, cash flows and changes in stockholders' equity for the
year then ended (not presented herein), and in our report dated January 14,
1997, we expressed an unqualified opinion on those consolidated financial
statements.
ERNST & YOUNG LLP
Boston, Massachusetts
July 14, 1997
- ------------------------------------------------------------------------------
PART I. ITEM 2
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Summary
Earnings per share were $.56 on a fully diluted basis, an increase of 27% from
$.44 in the second quarter of 1996. Revenue grew 22%, from $466 million to $568
million. Net income was $92 million, up from $71 million a year ago. Return on
stockholders' equity was 20.7%.
Condensed Income Statement - Taxable Equivalent Basis
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in millions, except per share data) 1997 1996 Change % 1997 1996 Change %
- ---------------------------------------------------------------------------------------------------------------------------------
Fee revenue:
Fiduciary compensation .............. $ 308 $ 256 $ 52 21 $ 594 $ 490 $ 104 21
Foreign exchange trading ............ 50 30 20 66 96 63 33 51
Servicing and processing ............ 39 29 10 38 79 57 22 39
Other ............................... 7 8 (1) (27) 9 20 (11) (52)
------ ------ ------ ------ ------ ------ ------ ------
Total fee revenue ................ 404 323 81 25 778 630 148 24
Net interest revenue ................... 167 145 22 15 327 284 43 15
Provision for loan losses .............. 3 2 1 50 6 4 2 50
------ ------ ------ ------ ------ ------ ------ ------
Total revenue .................... 568 466 102 22 1,099 910 189 21
Operating expenses ..................... 419 345 74 21 810 673 137 20
------ ------ ------ ------ ------ ------ ------ ------
Income before taxes .............. 149 121 28 24 289 237 52 22
Income taxes ........................... 44 39 5 14 88 77 11 14
Taxable equivalent adjustment .......... 13 11 2 23 23 19 4 23
------ ------ ------ ------ ------ ------ ------ ------
Net income ....................... $ 92 $ 71 $ 21 29 $ 178 $ 141 $ 37 26
====== ====== ====== ====== ====== ====== ====== ======
Earnings Per Share
Primary .......................... $ .57 $ .44 $ .13 30 $ 1.10 $ .86 $ .24 28
Fully diluted .................... .56 .44 .12 27 1.09 .86 .23 27
(Percentage change based on dollars in thousands, except per share data)
- ------------------------------------------------------------------------------
Total Revenue
Total revenue for the quarter was $568 million, up $102 million, or 22%, from a
year ago, reflecting growth in all lines of business. Revenue benefited
particularly from the continuing growth of cross-border investing, which had the
effect of increasing fiduciary compensation, foreign exchange trading revenue
and net interest revenue. Non-U.S. assets under custody for U.S. customers
increased 32%. International assets managed for U.S. customers increased 38%.
The number of foreign exchange transactions executed for customers increased
40%. Non-U.S. deposits increased 9%.
Year-to-date, total revenue was $1.1 billion, up $189 million, or 21%, from
1996, due to growth in both fee revenue and net interest revenue.
Fee Revenue
Fee revenue, which comprised 71% of total revenue, was $404 million, up 25% from
a year ago.
The largest component of fee revenue is fiduciary compensation, which is derived
from accounting, custody, recordkeeping, information, investment management and
trustee services. Fiduciary compensation was $308 million, up $52 million, or
21%, from a year ago due to broad-based growth driven by expanded and new
customer relationships, against a backdrop of increasing cross-border
investments and favorable securities markets.
In financial asset services, total assets under custody increased 32% to $3.5
trillion. Revenue from mutual funds reflected asset growth, particularly in
non-U.S. assets; new business; and growth in revenue from services for offshore
funds and fund administration. Total mutual fund assets under custody increased
24%, with the non-U.S. asset component up 35%. The number of offshore funds
State Street services was up 36% from a year ago and offshore fund assets were
up 66%. The number of funds for which State Street provided administration was
up 17%, and the assets under administration have more than doubled.
Revenue from servicing U.S. pension plans increased due to new business and
growth in existing customer relationships, and included increased revenue from
securities lending and portfolio accounting. For the corporation as a whole,
securities lending revenue growth was driven primarily by a 33% increase in
securities on loan, and secondarily by improved interest rate spreads.
Securities lending has grown steadily and now accounts for about 5% of total
revenue.
Outside the United States, revenue growth was driven by new business. Changes in
the regulatory environment and industry practices are increasing the demand for
State Street's services. Assets under custody for non-U.S. customers increased
35% from a year ago.
Revenue from investment management services, delivered through State Street
Global Advisors, was up substantially. Revenue growth occurred across the
product line - investment management for institutional investors, including
non-U.S. equity, fixed income, and U.S. equity strategies; recordkeeping and
investment services for defined contribution plans; and investment services for
high net worth individuals. Total assets managed increased 32% to $357 billion.
Slightly over 50% of this growth came from existing customers' additional
contributions and new customers, with slightly less than 50% from increased
market values.
Foreign exchange trading revenue was $50 million, up $20 million, or 66%, from a
year ago as State Street continued to attract additional customers for foreign
exchange services, both by establishing new relationships and by expanding
existing ones. Additionally, the current year's growth rate of 66% reflects
relatively weak revenue in 1996. Assets managed by many of these investors
increased, portfolio rebalancing resulted in more transactions, and greater
volatility in currency markets increased forward hedging activity and market
opportunities.
Growth of $10 million in servicing and processing fee revenue to $39 million
reflected, in part, the acquisition of Princeton Financial Systems in the fourth
quarter of 1996.
Other fee revenue this quarter included a number of non-recurring items. These
netted to revenue similar to that of a year ago. Last year's second quarter
included securities gains of $3 million. This year there were one time fees from
a real estate transaction and a gain on the sale of a non-strategic mortgage
servicing business. These were offset by currency translation losses on foreign
notes and a write-down of real estate previously acquired for expansion, which
will occur elsewhere.
For the six months ended June 30, 1997, fee revenue was $778 million, up $148
million, or 24%, over the same period in 1996. The growth was primarily
attributable to fiduciary compensation, which increased $104 million. Revenue
from foreign exchange trading increased $33 million, for the reasons noted
above, and revenue from servicing and processing increased $22 million, largely
due to the acquisition of Princeton Financial Systems.
Net Interest Revenue
Taxable equivalent net interest revenue for the second quarter was $167 million,
up $22 million, or 15%, from a year ago due primarily to a $4.3 billion, or 16%,
increase in average interest-earning assets. State Street uses its balance sheet
capacity primarily to support the needs of institutional investors. In the
second quarter these customers, in conjunction with their worldwide investment
activities, made increased use of securities sold under repurchase agreements
and deposits, which were invested in low-risk assets.
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30,
1997 1996
-------------------------- -------------------------
AVERAGE Average
(Dollars in millions) BALANCE RATE Balance Rate
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets................................ $ 30,331 5.79% $ 26,043 5.45%
Interest-bearing liabilities........................... 25,525 4.26 21,692 3.86
------ ------
Excess of rates earned over rates paid................. 1.53% 1.59%
====== ======
Net Interest Margin.................................... 2.21% 2.24%
====== ======
For the six months ended June 30, 1997, taxable equivalent net interest revenue
was $327 million, up $43 million, or 15%, from the same period in 1996 due to a
$4.2 billion, or 16%, increase in average interest-earning assets. The growth in
average interest-earning assets was driven primarily by a $2.3 billion increase
in securities sold under repurchase agreements and a $1.0 billion increase in
non-U.S. deposits.
Operating Expenses
Operating expenses for the second quarter of $419 million were up $74 million,
or 21%, from the second quarter of 1996 supporting business expansion and
investments for future growth, and reflecting acquisitions. Salaries and
employee benefits were $235 million, up $46 million, or 24%, due to 9% more
staff and an increase in incentive compensation resulting from strong financial
performance and a higher stock price.
For the six-month period ended June 30, 1996, operating expenses were up $137
million, or 20%, due primarily to increased salaries and employee benefits
costs.
Credit Quality
At June 30, 1997, total loans were $5.5 billion, 15% of the balance sheet. In
the second quarter, the provision for loan losses charged against income was $3
million, up from $2 million a year ago. During the quarter, the allowance for
loan losses increased from $70 million to $74 million.
During the second quarter, non-performing loans increased from $6 million to $10
million. Net recoveries were $1 million, versus recoveries of $2 million in the
year earlier period.
Taxes
Taxes were $44 million, up from $39 million a year ago. The effective tax rate
was 32.5%, down from 35.3% in the second quarter of 1996 and 33.6% in the first
quarter of 1997. This improvement in the tax rate resulted from increased tax
credits, tax exempt revenue and the use of non-U.S. tax loss carry forwards,
some of which are non-recurring.
Lines of Business
Following is a summary of line of business operating results for the six months
ended June 30:
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Investment Commercial
Taxable equivalent basis Asset Services Management Lending
(Dollars in millions) 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Fee revenue ......................... $ 560 $ 462 $ 190 $ 145 $ 28 $ 23
Net interest revenue ................ 229 198 12 13 80 69
------ ------ ------ ------ ------ ------
Total revenue ................. 789 660 202 158 108 92
Operating expenses .................. 601 506 162 125 47 42
====== ====== ====== ====== ====== ======
Operating profit .............. $ 188 $ 154 $ 40 $ 33 $ 61 $ 50
====== ====== ====== ====== ====== ======
Pretax margin ....................... 23.8% 23.3% 19.8% 20.7% 56.8% 54.8%
Percentage contribution ............. 65% 65% 14% 14% 21% 21%
Average assets (billions) ........... $ 29.2 $ 25.1 $ .7 $ .5 $ 3.6 $ 3.1
Financial Asset Services
Financial Asset Services provides accounting, custody, daily pricing,
information, foreign exchange, cash management, securities lending and other
services for investors with large pools of investment assets worldwide; and
corporate trusteeship. Revenue from this line of business comprised 72% of State
Street's total revenue for the first six months of 1997.
Revenue increased to $789 million, up 20% from $660 million in 1996. The $129
million increase in revenue resulted from increased cross-border investment
activity, the installation of a substantial amount of new business and expanding
relationships with customers, who are growing and using more services. Fee
revenue was up 22%. This reflected strong growth in revenue from accounting,
custody and other services for mutual funds, U.S. pension plans, and customers
outside the U.S. Foreign exchange trading revenue was up substantially. Net
interest revenue, up 16%, reflected an increase in interest-earning assets. The
primary source of growth in interest earning assets was additional funding from
customers in conjunction with their worldwide investment activities.
Operating expenses were $601 million, 19% higher than a year ago, due to
business growth and investments for future growth, and reflecting acquisitions.
Operating profit was $188 million, an increase of $34 million, or 22%, from a
year ago and reflected strong revenue growth.
Investment Management
State Street manages financial assets worldwide for both institutions and
individuals and provides related services, particularly participant
recordkeeping for defined contribution plans. State Street's investment
management services feature a broad array of products, including quantitative
equity management, both passive and active, money market funds, and fixed income
strategies. Revenue from this line of business comprised 18% of State Street's
total revenue for the first six months of 1997.
Revenue grew 27%, to $202 million, due to revenue growth across the product
line. Operating expenses increased 31% reflecting additional staff to support
business growth and acquisitions. Operating profit was $40 million, an increase
of $7 million, or 21%, from $33 million in 1996.
Commercial Lending
Commercial lending provides loans, credit facilities and other banking services
for regional middle-market companies, for companies in selected industries
nationwide, and for broker/dealers. Other credit services include asset-based
finance, leasing and international trade finance. Revenue from this line of
business comprised 10% of State Street's total revenue for the first six months
of 1997.
Revenue grew to $108 million, up 17% from $92 million in the six months ended
June 30, 1996, due primarily to a 22% increase in loans. Loans to New England
businesses and specialty industries nationwide, leveraged leases, and
international trade finance all grew.
Operating expenses increased 12%, supporting business growth. Operating profit
was $61 million, an increase of $11 million, or 22%, from 1996, due to revenue
growth and an improvement in the pre-tax margin.
Accounting Changes
Information related to accounting changes appears in Note A to the Consolidated
Financial Statements.
Capital and Liquidity
State Street maintains a strong capital base to support its customers. Strong
capital levels provide financial flexibility as well, which facilitates funding
corporate growth and other business needs.
State Street is regulated by the Federal Reserve Board, which has established
guidelines for minimum capital ratios. State Street has developed internal
capital-adequacy policies to ensure that State Street Bank meets or exceeds the
level required for the Federal Reserve Board's "well capitalized" category under
the Prompt Corrective Action Regulations. State Street's capital management
emphasizes risk exposure rather than simple asset levels; at 13.0%, State
Street's Tier 1 risk-based capital ratio significantly exceeds the regulatory
minimum of 4% and is among the highest for U.S. bankholding companies. State
Street's total risk-based ratio of 13.1% also significantly exceeds the
regulatory minimum, and is among the highest for U.S. bank holding companies.
The primary objective of State Street's liquidity management is to ensure that
it has sufficient funds to conduct its activities, including accommodating the
transaction and cash management requirements of its customers, meeting loan
commitments and replacing maturing liabilities. Liquidity is provided by State
Street's access to global debt markets, its ability to gather additional
deposits from its customers, maturing short-term assets, the sale of securities
and payments of loans. Customer deposits and other funds provide a
multi-currency, geographically-diverse source of funding.
State Street maintains a large portfolio of liquid assets. When liquidity is
measured by the ratio of liquid assets to total assets, State Street ranks among
the highest of U.S. banking companies. At June 30, 1997, State Street's liquid
assets were 77% of total assets.
Foreign Exchange And Derivative Financial Instruments
State Street uses foreign exchange and a variety of financial derivative
instruments to support customers' needs, conduct trading activities, and manage
interest rate and currency risk. These activities are designed to create trading
revenue or hedge net interest revenue. In addition, State Street provides
services related to derivative instruments in its role as both a manager and
servicer of financial assets.
State Street's customers use derivatives to manage the financial risks
associated with their investment goals and business activities. With the growth
of cross-border investing, customers have an increasing need for foreign
exchange forward contracts to convert currency for international investment and
to manage the currency risk in an international investment portfolio. As an
active participant in the foreign exchange markets, State Street provides
foreign exchange contracts and over-the-counter options in support of these
customer needs.
As part of its trading activities, State Street assumes market positions in both
the foreign exchange and interest rate markets using financial derivatives
including forward foreign exchange contracts, foreign exchange and interest rate
options, and interest rate swaps.
As of June 30, 1997, the notional amount of these instruments was $99.1 billion,
of which $96.5 billion was foreign exchange forward contracts. Long and short
foreign exchange forward positions are closely matched to minimize currency and
interest rate risk. In order to estimate changes in the value of the outstanding
contracts, all forward foreign exchange contracts are valued daily at current
market rates.
State Street uses various derivatives to minimize the interest rate and foreign
exchange risks associated with its global business activities. As of June 30,
1997, the notional amount of these derivatives was $605 million.
Trading activities involving both foreign exchange and interest rate derivatives
are managed using earnings-at-risk measures and trading limits as established by
risk management policies. Interest rate and foreign exchange derivatives used as
part of the asset and liability management process undergo the same credit and
interest rate risk analyses as on-balance sheet financial instruments.
Stockholders' Equity
The authorized number of common shares increased from 112 million at December
31, 1996 to 250 million at June 30, 1997. On May 28, 1997, State Street
distributed a two-for-one stock split in the form of a 100% stock dividend to
shareholders of record on April 30, 1997. The par value of these additional
shares was capitalized by a transfer from retained earnings to common stock.
Earnings per share data has been restated for the stock split.
State Street purchased the equivalent of 200,000 post-split shares of its stock
during the second quarter of 1997. Under the Board of Director's current
authorization, 3.4 million post-split shares remain to be purchased.
Financial Goals and Factors That May Affect Them
State Street's primary financial goal is sustainable real growth in earnings per
share. There are two supporting goals, one for total revenue and one for return
on common stockholder's equity ("ROE"). The revenue goal is 12.5% real, or
inflation adjusted, growth in revenue per year for the decade of the 1990s.
Decade-to-date, this has translated into a nominal growth goal of 15.2%
compounded per year. The ROE goal is to achieve 18%.
State Street considers these to be financial goals, not projections or
forward-looking statements. However, if these goals are perceived to be
forward-looking statements, they, as with any other statement that may be
considered forward looking, should be considered in conjunction with the factors
listed below, which could cause actual results to differ materially.
The following issues and factors, among others, should be considered in
evaluating the outlook for State Street's goals and forward-looking statements:
o Cross-border investing. Cross-border investing by customers worldwide
benefits State Street's revenue. Future revenue may increase or decrease
depending upon the extent of cross-border investments made by customers or
future customers.
o Savings rate of individuals. State Street benefits from the savings of
individuals which are invested in mutual funds or defined contribution
plans. Changes in savings rates or styles may lead to increased or decreased
revenue.
o Value of worldwide financial markets. As worldwide financial markets
increase or decrease in value, State Street's opportunities to invest and
service financial assets may change. Since a portion of State Street's fees
are based on the value of assets under custody and management, fluctuations
in worldwide securities market valuations will affect revenue.
o Dynamics of markets served. Changes in the markets served can affect
revenue, including the growth rate of U.S. mutual funds, the pace of debt
issuance, outsourcing decisions, and mergers, acquisitions and
consolidations among customers and competitors.
o Interest rates. Market interest rate levels, the direction of interest rate
changes, and the shape of the yield curve affect both net interest revenue
and fiduciary compensation from securities lending. All else being equal,
State Street benefits from higher market rates along with a steeper yield
curve, which have a favorable impact by increasing asset yield as well as
increasing the return on State Street's large volume of non-interest bearing
sources of funds. However, because State Street is liability sensitive in
the short-term (interest-bearing liabilities reprice faster than
interest-earning assets) a rising rate environment will reduce net interest
revenue from what it would otherwise have been.
o Pace of pension reform. State Street expects to benefit from worldwide
pension reform that creates additional pools of assets that use custody and
related services of investment management services. The pace of pension
reform will affect the pace of revenue growth.
o Pricing/competition. Future prices State Street is able to obtain for its
products may increase or decrease from current levels depending upon demand
for its products and its competitors' activities. State Street, or its
competitors, could introduce new products into the marketplace.
o Pace of new business. The pace at which existing and new customers use
additional services will affect future revenue.
o Business mix. Changes in business mix, including the mix of U.S. and
non-U.S. business, will affect earnings growth rates.
o Rate of technological change. Technological change creates opportunities for
product differentiation and reduced costs as well as the possibility of
increased expenses.
Based on its evaluation of these factors, management is currently optimistic
about State Street's long-term prospects.
Conclusion
The second quarter was another record-breaking quarter. State Street's financial
results extended the strong growth of the previous two quarters, continuing
performance above the company's long-term trends. The amount of new business
signed was up substantially from a year ago. This new business, from both
existing and new customers, will be installed over the next several quarters.
Management recognizes that the global economic environment is favorable for
financial assets and, by extension, for State Street. Management has positioned
State Street to benefit from the increase in cross-border investing, the rising
demand for currency risk management products, and the increased prices and
activity in securities markets. The 27% earnings per share growth rate of the
first six months is substantially above State Street's average of 15% per year
for the last ten years. However, State Street expects the earnings per share
results for the second half of 1997 to be equal to or better than the results
for the first half. Actual results may differ materially from this forward
looking information, which information is subject to the factors referred to
above and a continuation of the favorable global economic environment.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Registrant's annual meeting of stockholders was held on April 16, 1997. At the
Meeting the following nominees for Director were elected and the following
proposals were approved:
1. Election of Six Directors:
Number of Shares
--------------------------------------
For Withheld
----------------- -----------------
I. MacAllister Booth 68,364,712 388,351
James I. Cash, Jr. 68,366,960 386,103
Truman S. Casner 67,901,818 851,245
Arthur L. Goldstein 68,339,877 413,186
David B. Perini 68,348,368 404,695
Dennis J. Picard 68,367,356 385,707
Delivered not Voted 320
The following directors continue in office: Tenley E. Albright, M.D., Joseph A.
Baute, Marshall N. Carter, Nader F. Darehshori, Charles F. Kaye, John M.
Kucharski, Charles R. LaMantia, Alfred Poe, Bernard W. Reznicek, David A. Spina,
and Robert E. Weissman.
2. That Article 1 of the Restated Articles of Organization be amended to change
the name of the Corporation from State Street Boston Corporation to State
Street Corporation.
Number of Shares
For 67,456,755
Against 376,734
Abstain 919,574
Delivered not Voted 320
3. That Article 3 of the Restated Articles of Organization be amended to
increase the authorized number of shares of the Corporation's Common Stock,
$1 par value, from 112 million to 250 million and to authorize the issuance
from time to time of authorized and unissued shares of the Corporation by
the Board of Directors.
Number of Shares
For 66,278,074
Against 1,369,069
Abstain 1,105,919
Delivered not Voted 320
4. That the Senior Executive Annual Incentive Plan of the Corporation be
approved.
Number of Shares
For 65,187,206
Against 2,073,859
Abstain 1,491,994
Delivered not Voted 323
5. That the 1997 Equity Incentive Plan of the Corporation be approved.
Number of Shares
For 58,436,195
Against 8,689,792
Abstain 1,627,072
Delivered not Voted 323
ITEM 5. OTHER INFORMATION
The authorized number of common shares increased from 112 million at December
31, 1997 to 250 million at June 30, 1997. On May 28, 1997, State Street
distributed a two-for-one stock split in the form of a 100% stock dividend to
shareholders of record on April 30, 1997. The par value of these additional
shares was capitalized by a transfer from retained earnings to common stock.
On June 19, 1997, the registrant's Board of Directors voted to increase the
amount of Common Stock shares to be repurchased, to adjust for the two-for-one
stock split distributed in the form of a stock dividend on May 28, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit Page of
Number this Report
------- -----------
3.1 Restated Articles of Organization as amended (filed
with the Securities and Exchange Commission as
Exhibit 3.1 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1995 and
incorporated
by reference).
3.4 Amendments to Articles 1 and 3 of the Restated Articles
of Organization 24-26
10.22 1997 Equity Incentive Plan of the Corporation 27-39
11 Statement re: computation of per share earnings 40
12 Ratio of Earnings to Fixed Charges 41
15 Letter re: unaudited interim financial information 42
27 Financial data schedule 43
(b) Reports on Form 8-K
A current report on Form 8-K dated March 11, 1997 was filed by the Registrant on
April 17, 1997 with the Securities and Exchange Commission which reported that
on March 11, 1997, the Registrant completed the sale of $300 million of 8.035%
Capital Securities, Series A (the "Capital Securities") issued by State Street
Institutional Capital B (the "Trust"), a newly created subsidiary business trust
of the Registrant. The Capital Securities are guaranteed by the Registrant. In
connection with the sale of the Capital Securities, the Registrant issued and
sold to the Trust $309 million of its 8.035% Junior Subordinated Deferrable
Interest Debentures, Series B (the "Debentures").
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE STREET CORPORATION
Date: August 12, 1997 By: /s/ Ronald L. O'Kelley
---------------------------------------------------
Ronald L. O'Kelley
Executive Vice President and Chief Financial Officer
Date: August 12, 1997 By: /s/ Rex S. Schuette
---------------------------------------------------
Rex S. Schuette
Senior Vice President and Comptroller