-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TgVNqKp0BuNqfvZOSQxG7pAugB7oPs42chakGNg/L8VOsgax+sOjTc4j8YCrPPaf MoVHrVwv7i/8kLtn+X/4MA== /in/edgar/work/20000811/0000927016-00-002918/0000927016-00-002918.txt : 20000921 0000927016-00-002918.hdr.sgml : 20000921 ACCESSION NUMBER: 0000927016-00-002918 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATE STREET CORP CENTRAL INDEX KEY: 0000093751 STANDARD INDUSTRIAL CLASSIFICATION: [6022 ] IRS NUMBER: 042456637 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07511 FILM NUMBER: 693441 BUSINESS ADDRESS: STREET 1: 225 FRANKLIN ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6177863000 MAIL ADDRESS: STREET 1: 225 FRANKLIN STREET CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: STATE STREET BOSTON FINANCIAL CORP DATE OF NAME CHANGE: 19780525 10-Q 1 0001.txt FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES 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 June 30, 2000 [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to Commission File No. 0-5108 STATE STREET CORPORATION (Exact name of registrant as specified in its charter) COMMONWEALTH OF MASSACHUSETTS 04-2456637 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.)
225 Franklin Street 02110 Boston, Massachusetts (Zip Code) (Address of principal executive office)
617-786-3000 (Registrant's telephone number, including area code) ------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares of the Registrant's Common Stock outstanding on July 31, 2000 was 161,231,268. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- STATE STREET CORPORATION Table of Contents
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income........................................ 1 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 Independent Accountants' Review Report................................... 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 14 Item 3. Quantitative and Qualitative Disclosure About Market Risk....... 23 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................ 23 Signatures............................................................... 24 Exhibits
PART I. ITEM 1. FINANCIAL STATEMENTS Consolidated Statement of Income - State Street Corporation (Unaudited) - ------------------------------------------------------------------------------
(Dollars in millions, except per share data) Three months ended June 30, 2000 1999 - ------------------------------------------------------------------------------ Fee Revenue Fiduciary compensation: Services for Institutional Investors........................ $ 362 $ 288 Investment Management....................................... 131 144 -------- -------- Total fiduciary compensation................................ 493 432 Foreign exchange trading.................................... 101 69 Servicing and processing.................................... 57 56 Other....................................................... 5 18 -------- -------- Total fee revenue.......................................... 656 575 Net Interest Revenue Interest revenue............................................ 768 610 Interest expense............................................ 553 416 -------- -------- Net interest revenue....................................... 215 194 Provision for loan losses................................... 2 4 -------- -------- Net interest revenue after provision for loan losses....... 213 190 -------- -------- Total Revenue.............................................. 869 765 Operating Expenses Salaries and employee benefits.............................. 366 323 Information systems and communications...................... 75 73 Transaction processing services............................. 66 57 Occupancy................................................... 48 46 Other....................................................... 87 78 -------- -------- Total operating expenses................................... 642 577 -------- -------- Income before income taxes................................. 227 188 Income taxes................................................ 79 65 -------- -------- Net Income................................................. $ 148 $ 123 ======== ======== Earnings Per Share Basic...................................................... $ .92 $ .77 Diluted.................................................... .90 .75 Average Shares Outstanding (in thousands) Basic...................................................... 160,847 161,158 Diluted.................................................... 164,045 164,171 Cash Dividends Declared Per Share........................... $ .17 $ .15
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 1 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Consolidated Statement of Income - State Street Corporation (Unaudited) - ------------------------------------------------------------------------------
(Dollars in millions, except per share data) Six months ended June 30, 2000 1999 - ------------------------------------------------------------------------------ Fee Revenue Fiduciary compensation: Services for Institutional Investors........................ $ 711 $ 563 Investment Management....................................... 312 277 -------- -------- Total fiduciary compensation............................... 1,023 840 Foreign exchange trading.................................... 207 163 Servicing and processing.................................... 119 101 Other....................................................... 12 23 -------- -------- Total fee revenue.......................................... 1,361 1,127 Net Interest Revenue Interest revenue............................................ 1,494 1,174 Interest expense............................................ 1,067 786 -------- -------- Net interest revenue....................................... 427 388 Provision for loan losses................................... 5 8 -------- -------- Net interest revenue after provision for loan losses....... 422 380 -------- -------- Total Revenue.............................................. 1,783 1,507 Operating Expenses Salaries and employee benefits.............................. 752 632 Information systems and communications...................... 153 145 Transaction processing services............................. 141 109 Occupancy................................................... 98 92 Other....................................................... 182 156 -------- -------- Total operating expenses................................... 1,326 1,134 -------- -------- Income before income taxes................................. 457 373 Income taxes................................................ 160 128 -------- -------- Net Income................................................. $ 297 $ 245 ======== ======== Earnings Per Share Basic...................................................... $ 1.85 $ 1.52 Diluted.................................................... 1.82 1.49 Average Shares Outstanding (in thousands) Basic...................................................... 160,341 161,050 Diluted.................................................... 163,415 164,007 Cash Dividends Declared Per Share........................... $ .33 $ .29
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 2 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Consolidated Statement of Condition - State Street Corporation - -------------------------------------------------------------------------------
June 30, December 31, (Dollars in millions) 2000 1999 - ------------------------------------------------------------------------------- (Unaudited) Assets Cash and due from banks.............................. $ 2,506 $ 2,930 Interest-bearing deposits with banks................. 17,637 16,902 Securities purchased under resale agreements and securities borrowed................................. 16,570 17,518 Federal funds sold................................... 2,115 410 Trading account assets............................... 1,325 786 Investment securities (principally available-for- sale)............................................... 15,506 14,703 Loans (less allowance of $53 and $48)................ 5,330 4,245 Premises and equipment............................... 655 732 Accrued income receivable............................ 696 717 Other assets......................................... 2,290 1,953 -------- -------- Total Assets...................................... $ 64,630 $ 60,896 ======== ======== Liabilities Deposits: Noninterest-bearing................................. $ 9,533 $ 8,943 Interest-bearing: U.S................................................ 2,537 1,917 Non-U.S............................................ 25,300 23,285 -------- -------- Total deposits.................................... 37,370 34,145 Securities sold under repurchase agreements.......... 18,429 18,399 Federal funds purchased.............................. 65 1,054 Other short-term borrowings.......................... 275 1,104 Accrued taxes and other expenses..................... 1,151 1,133 Other liabilities.................................... 3,189 1,488 Long-term debt....................................... 1,220 921 -------- -------- Total Liabilities................................. 61,699 58,244 Stockholders' Equity Preferred stock, no par: authorized 3,500,000; issued none................................................ Common stock, $1 par: authorized 250,000,000; issued 167,222,000 and 167,225,000......................... 167 167 Surplus.............................................. 66 55 Retained earnings.................................... 3,038 2,795 Net unrealized losses................................ (75) (57) Treasury stock, at cost (6,080,000 and 7,635,000 shares)............................................. (265) (308) -------- -------- Total Stockholders' Equity........................ 2,931 2,652 -------- -------- Total Liabilities and Stockholders' Equity........ $ 64,630 $ 60,896 ======== ========
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 3 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Consolidated Statement of Cash Flows - State Street Corporation (Unaudited) - -------------------------------------------------------------------------------
(Dollars in millions) Six months ended June 30, 2000 1999 - ------------------------------------------------------------------------------- Operating Activities Net Income................................................... $ 297 $ 245 Non-cash charges for depreciation, amortization, provision for loan losses and deferred income taxes................... 125 139 ------- ------- Net income adjusted for non-cash charges.................. 422 384 Adjustments to reconcile to net cash (used) provided by operating activities: Securities gains, net....................................... (5) Net change in: Trading account assets..................................... (539) (394) Other, net................................................. (8) (94) ------- ------- Net Cash Used by Operating Activities..................... (125) (109) ------- ------- Investing Activities Payments for purchases of: Available-for-sale securities............................... (3,594) (7,153) Held-to-maturity securities................................. (194) (582) Lease financing assets...................................... (518) (20) Premises and equipment...................................... (42) (89) Proceeds from: Maturities of available-for-sale securities................. 2,757 3,348 Maturities of held-to-maturity securities................... 177 563 Sales of available-for-sale securities...................... 39 414 Principal collected from lease financing.................... 34 76 Net (payments for) proceeds from: Interest-bearing deposits with banks........................ (735) (2,124) Federal funds sold, resale agreements and securities borrowed................................................... (757) 1,331 Loans....................................................... (939) (1,015) ------- ------- Net Cash Used by Investing Activities..................... (3,772) (5,251) ------- ------- Financing Activities Proceeds from issuance of: Non-recourse debt for lease financing....................... 435 Long-term debt.............................................. 300 Treasury stock.............................................. 50 14 Payments for: Non-recourse debt for lease financing....................... (46) (93) Long-term debt.............................................. (2) (1) Cash dividends.............................................. (51) (48) Purchase of common stock.................................... (37) (38) Net proceeds from (payments for): Deposits.................................................... 3,225 5,243 Short-term borrowings....................................... (401) 709 ------- ------- Net Cash Provided by Financing Activities................. 3,473 5,786 ------- ------- Net (Decrease) Increase................................... (424) 426 Cash and due from banks at beginning of period............... 2,930 1,365 ------- ------- Cash and Due From Banks at End of Period.................. $ 2,506 $ 1,791 ======= =======
- -------------------------------------------------------------------------------- The accompanying notes are in integral part of these financial statements. 4 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Consolidated Statement of Changes in Stockholders' Equity - State Street Corporation (Unaudited) - ------------------------------------------------------------------------------
(Dollars in millions, except share data) Six months ended June 30, 2000 1999 - ------------------------------------------------------------------------------ Common Stock Balance at end of period (no change during period)...................................... $ 167 $ 167 Surplus Balance at beginning of period................ 55 63 Treasury stock issued......................... (29) (27) Stock options exercised....................... 40 15 ------- ------- Balance at end of period..................... 66 51 ------- ------- Retained Earnings Balance at beginning of period................ 2,795 2,272 Net income.................................... 297 $ 297 245 $ 245 Cash dividends declared ($.33 and $.29 per share)....................................... (54) (48) ------- ------- Balance at end of period..................... 3,038 2,469 ------- ------- Net Unrealized (Losses) Gains--Other Comprehensive Income Balance at beginning of period................ (57) 22 Foreign currency translation.................. (9) (9) (12) (12) Net unrealized loss on available-for-sale securities................................... (9) (9) (48) (48) ------- ----- ------- ----- (18) (60) ----- ----- Balance at end of period..................... (75) (38) ------- ------- Comprehensive Income.......................... $ 279 $ 185 ===== ===== Treasury Stock, at Cost Balance at beginning of period................ (308) (213) Common stock acquired (419,000 and 495,000 shares)...................................... (37) (38) Treasury stock issued (1,974,000 and 904,000 shares)...................................... 80 43 ------- ------- Balance at end of period..................... (265) (208) ------- ------- Total Stockholders' Equity.................. $ 2,931 $ 2,441 ======= =======
- -------------------------------------------------------------------------------- The accompanying notes are in integral part of these financial statements. 5 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Notes to Consolidated Financial Statements - State Street Corporation (Unaudited) Note A--Basis of Presentation State Street Corporation ("State Street" or the "Corporation") is a financial holding company that provides trust, investment management, global custody, banking, administration and information services to both U.S. and non-U.S. customers. State Street reports two lines of business. Services for Institutional Investors includes accounting, custody, daily pricing, administration, foreign exchange, cash management, lending activities, lease financing and information services to support institutional investors. Investment Management provides an extensive array of services for managing financial assets worldwide for both institutional and individual investors as well as recordkeeping, administration and investment services for defined contribution plans and other employee benefit programs. The impact of a divested business for the prior period has been presented separately under the caption "Business Divestiture" in Note I. The consolidated financial statements include the accounts of State Street and its subsidiaries, including its principal subsidiary, State Street Bank and Trust Company ("State Street Bank"). The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated upon consolidation. The results of operations of businesses purchased are included from the date of acquisition. Investments in 50%-owned affiliates are accounted for using the equity method. Certain previously reported amounts have been reclassified to conform to the current method of presentation. Total comprehensive income for the three months ended June 30, 2000 and 1999 was $155 million and $80 million, respectively. Total comprehensive income for the six months ended June 30, 2000 and 1999 was $279 million and $185 million, respectively. Tax benefits of $6 million and $34 million related to fair value adjustments for the investment portfolio, and tax benefits of $6 million and $8 million related to foreign currency translation, were included in other comprehensive income for the six months ended June 30, 2000 and 1999, respectively. In the opinion of management, all adjustments consisting of normal recurring accruals, which are necessary for a fair presentation of the financial position of State Street and subsidiaries at June 30, 2000 and December 31, 1999, its cash flows for the six months ended June 30, 2000 and 1999, and consolidated results of its operations for the three months and six months ended June 30, 2000 and 1999, have been made. These statements should be read in conjunction with the financial statements and other information included in State Street's latest annual report on Form 10-K. Note B--Joint Venture In April 2000, State Street and Citigroup completed the formation of CitiStreet, LLC, a 50/50 joint venture designed to service employee benefit programs. State Street's contribution to the joint venture consisted of its retirement investment services businesses and the total outsourcing business of Wellspring Resources, LLC, a wholly owned subsidiary. 6 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Notes to Consolidated Financial Statements - State Street Corporation (Unaudited) Note C--Investment Securities Available-for-sale securities are recorded at fair value and held-to- maturity securities are recorded at amortized cost on the Consolidated Statement of Condition. Investment securities consisted of the following as of the dates indicated: - -----------------------------------------------------------------------------------------
June 30, 2000 December 31, 1999 ------------------------------- ------------------------------- Unrealized Unrealized Amortized ------------ Fair Amortized ------------ Fair (Dollars in millions) Cost Gains Losses Value Cost Gains Losses Value - ----------------------------------------------------------------------------------------- Available for sale: U.S. Treasury and federal agencies...... $ 7,103 $ 8 $ 50 $ 7,061 $ 6,899 $ 2 $ 36 $ 6,865 State and political subdivisions.......... 2,011 2 10 2,003 1,886 2 11 1,877 Asset-backed securities............ 3,610 2 28 3,584 3,261 1 25 3,237 Collateralized mortgage obligations........... 867 1 13 855 841 10 831 Other investments...... 728 1 9 720 630 1 5 626 -------- ---- ----- -------- -------- --- ---- -------- Total.................. $ 14,319 $ 14 $ 110 $ 14,223 $ 13,517 $ 6 $ 87 $ 13,436 -------- ---- ----- -------- -------- --- ---- -------- Held to maturity: U.S. Treasury and federal agencies...... $ 1,235 $ 1 $ 8 $ 1,228 $ 1,219 $ $ 11 $ 1,208 Other investments...... 48 48 48 48 -------- ---- ----- -------- -------- --- ---- -------- Total.................. $ 1,283 $ 1 $ 8 $ 1,276 $ 1,267 $ $ 11 $ 1,256 ======== ==== ===== ======== ======== === ==== ========
- ------------------------------------------------------------------------------- During the six months ended June 30, 2000, there were gross gains and gross losses of less than $1 million realized on the sales of $39 million of available-for-sale securities. During the six months ended June 30, 1999, there were gross gains of $6 million and gross losses of $1 million realized on the sales of $414 million of available-for-sale securities. Note D--Allowance for Loan Losses State Street establishes an allowance for loan losses to absorb probable credit losses. Management's review of the adequacy of the allowance for loan losses is ongoing throughout the year and is based, among other factors, on previous loss experience, current economic conditions and adverse situations that may affect the borrowers' ability to repay, timing of future payments, estimated value of the underlying collateral, the performance of individual credits in relation to contract terms and other relevant factors. While the allowance is established to absorb probable losses inherent in the total loan portfolio, management allocates the allowance for loan losses to specific loans, selected portfolio segments and certain off-balance sheet exposures and commitments. Adversely classified loans in excess of $1 million are individually reviewed to evaluate risk of loss and are assigned a specific allocation of the allowance. The allocations are based on an assessment of potential risk of loss and include evaluations of the borrowers' financial strength, discounted cash flows, collateral, appraisals and guarantees. The allocations to portfolio segments and off-balance sheet exposures are based on management's evaluation of relevant factors, including the current level of problem loans and current economic conditions which are subject to change from quarter to quarter. In addition, a portion of the allowance remains unallocated as a general reserve for the entire loan portfolio. The general reserve is based upon such factors as portfolio concentration, historical losses and current economic conditions. On October 1, 1999, State Street completed the sale of its commercial banking business, which included the transfer of $2.4 billion of commercial, financial and real estate loans, and a $36 million allowance for loan losses. 7 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Notes to Consolidated Financial Statements - State Street Corporation (Unaudited) Note D--Allowance for Loan Losses (continued) Changes in the allowance for loan losses were as follows: - --------------------------------------------------------------------------------
Six Three Months Months Ended Ended June 30, June 30, ------------- ---------- (Dollars in millions) 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Balance at beginning of period....................... $ 50 $ 85 $ 48 $ 84 Provision for loan losses............................ 2 4 5 8 Loan charge-offs..................................... (1) (1) (4) Recoveries........................................... 1 1 ------ ------ ---- ---- Balance at end of period............................ $ 53 $ 88 $ 53 $ 88 ====== ====== ==== ====
- ------------------------------------------------------------------------------- Note E--Long-term Debt On April 11, 2000, State Street filed a universal shelf registration statement to increase the amount available for issuance of unsecured debt from $200 million to $1 billion. The shelf registration statement allows for the offering and sale of unsecured debt securities, capital securities, common stock, depositary shares and preferred stock, and warrants to purchase such securities, including any shares into which the preferred stock or depositary shares may be convertible. On June 15, 2000, State Street issued $300 million in subordinated notes due 2010 at a coupon rate of 7.65%. At June 30, 2000, $700 million of the shelf registration is available for issuance. Note F--Net Interest Revenue Net interest revenue consisted of the following: - -------------------------------------------------------------------------------
Three Months Six Months Ended Ended June 30, June 30, ------------- ------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------- Interest Revenue Deposits with banks............................... $ 168 $ 135 $ 315 $ 251 Investment securities: U.S. Treasury and federal agencies............... 134 89 262 162 State and political subdivisions (exempt from federal tax).................................... 21 16 42 33 Other investments................................ 84 48 160 94 Loans............................................. 74 112 141 220 Securities purchased under resale agreements, securities borrowed and federal funds sold....... 272 205 546 407 Trading account assets............................ 15 5 28 7 ------ ------ ------ ------ Total interest revenue.......................... 768 610 1,494 1,174 ====== ====== ====== ====== Interest Expense Deposits.......................................... 240 186 458 343 Other borrowings.................................. 295 212 573 408 Long-term debt.................................... 18 18 36 35 ------ ------ ------ ------ Total interest expense.......................... 553 416 1,067 786 ------ ------ ------ ------ Net interest revenue............................ $ 215 $ 194 $ 427 $ 388 ====== ====== ====== ======
- ------------------------------------------------------------------------------- 8 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Notes to Consolidated Financial Statements - State Street Corporation (Unaudited) Note G--Operating Expenses - Other The other category of operating expenses consisted of the following: - -------------------------------------------------------------------------------
Three Months Six Months Ended Ended June 30, June 30, ------------- ----------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------- Professional services................................ $ 34 $ 28 $ 67 $ 55 Advertising and sales promotion...................... 15 15 30 30 Other................................................ 38 35 85 71 ------ ------ ----- ----- Total operating expenses -- other................... $ 87 $ 78 $ 182 $ 156 ====== ====== ===== =====
- ------------------------------------------------------------------------------- Note H--Regulatory Matters The regulatory capital amounts and ratios were the following at June 30, 2000, and December 31, 1999: - ------------------------------------------------------------------------------------
Regulatory Guidelines(/1/) ------------------- State Street State Street Bank Well ------------------ ------------------ (Dollars in millions) Minimum Capitalized 2000 1999 2000 1999 - ------------------------------------------------------------------------------------ Risk-based ratios: Tier 1 capital......... 4% 6% 13.8% 14.7% 12.6% 13.5% Total capital.......... 8 10 14.9 14.7 12.7 13.7 Leverage ratio.......... 3 5 5.6 5.6 5.5 5.7 Tier 1 capital......... $ 3,400 $ 3,119 $ 3,088 $ 2,841 Total capital.......... 3,683 3,121 3,125 2,889 Adjusted risk-weighted assets and market-risk equivalents: On-balance sheet...... $ 17,754 $ 15,293 $ 17,561 $ 15,108 Off-balance sheet..... 6,336 5,451 6,351 5,464 Market-risk equivalents.......... 630 475 600 454 -------- -------- -------- -------- Total................ $ 24,720 $ 21,219 $ 24,512 $ 21,026 ======== ======== ======== ========
- ------------------------------------------------------------------------------- (1) State Street Bank must meet the regulatory designation of "well capitalized" in order for State Street to maintain its status as a financial holding company. In addition, Regulation Y defines "well capitalized" for a bank holding company such as State Street for the purpose of determining eligibility for a streamlined review process for acquisition proposals (for such purposes, "well capitalized" requires State Street to maintain a minimum Tier 1 risk-based capital ratio of 6% and a minimum total risk-based capital ratio of 10%). 9 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Notes to Consolidated Financial Statements - State Street Corporation (Unaudited) Note I--Lines of Business Further financial information by lines of business is contained within the Lines of Business section of Management's Discussion and Analysis of Financial Condition and Results of Operation on pages 17 and 18. The following is a summary of the lines of business operating results for the six months ended June 30: - -------------------------------------------------------------------------------
Services for Investment Business Institutional Investors Management Divestiture ----------------------- ----------- ------------- (Dollars in millions; taxable equivalent) 2000 1999 2000 1999 2000 1999 - ------------------------------------------------------------------------------- Total revenue............... $ 1,404 $ 1,131 $ 412 $ 335 $ 58 Income before income taxes.. 399 301 91 62 27 Average assets (billions)... 59.1 49.5 1.7 1.2 2.3
- ------------------------------------------------------------------------------- Note J--Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: - ------------------------------------------------------------------------------
Three Months Six Months Ended Ended June 30, June 30, ----------------- ----------------- (Dollars in millions, except per share data; shares in thousands) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ Net Income................................ $ 148 $ 123 $ 297 $ 245 Earnings per share Basic.................................... $ .92 $ .77 $ 1.85 $ 1.52 Diluted.................................. .90 .75 1.82 1.49 Basic average shares...................... 160,847 161,158 160,341 161,050 Stock options and stock awards........... 2,597 2,225 2,434 2,168 7.75% convertible subordinated debentures.............................. 601 788 640 789 -------- -------- -------- -------- Dilutive average shares................... 164,045 164,171 163,415 164,007 ======== ======== ======== ========
- ------------------------------------------------------------------------------- Note K--Income Taxes The provision for income taxes included in the Consolidated Statement of Income consisted of the following: - --------------------------------------------------------------------------------
Three Months Six Months Ended Ended June 30, June 30, -------------- ------------ (Dollars in millions) 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Current........................................... $ 25 $ 44 $ 61 $ 67 Deferred.......................................... 54 21 98 61 ------ ------ ----- ----- Total provision.................................. $ 79 $ 65 $ 159 $ 128 ====== ====== ===== ===== Effective tax rate................................ 34.9% 34.4% 34.9% 34.4% ====== ====== ===== =====
- ------------------------------------------------------------------------------- 10 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Notes to Consolidated Financial Statements - State Street Corporation (Unaudited) Note L--Commitments and Contingent Liabilities State Street acts in a fiduciary or custodial capacity on behalf of its customers. Assets under custody and assets under management are held by and are not included in the Consolidated Statement of Condition because such items are not assets of State Street. Management conducts regular reviews of its responsibilities for these services and considers the results in preparing its financial statements. In the opinion of management, there are no contingent liabilities at June 30, 2000, which would have a material adverse effect on State Street's financial position or results of operations. State Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these actions can be successfully defended or resolved without a material adverse effect on State Street's financial position or results of operations. Note M--Off-Balance Sheet Financial Instruments, Including Derivatives State Street uses various off-balance sheet financial instruments, including derivatives, to satisfy the financing and risk management needs of customers, to manage interest rate and currency risk and to conduct trading activities. A derivative instrument is a contract or agreement whose value is derived from interest rates, currency exchange rates or other financial indices. Derivative instruments include forwards, swaps, options and other instruments with similar characteristics. The use of these instruments generates fee, interest or trading revenue. Associated with these instruments are market and credit risks that could expose State Street to potential losses. The following table summarizes the contractual or notional amounts of derivative financial instruments held or issued by State Street for trading and balance sheet management: - --------------------------------------------------------------------------------
June 30, December 31, (Dollars in millions) 2000 1999 - -------------------------------------------------------------------------------- Trading: Interest rate contracts: Swap agreements......................................... $ 2,557 $ 1,986 Options and caps purchased.............................. 342 148 Options and caps written................................ 441 279 Futures--short position................................. 5,826 3,836 Options on futures purchased............................ 795 705 Options on futures written.............................. 680 900 Foreign exchange contracts: Forward, swap and spot.................................. 161,443 122,795 Options purchased....................................... 519 187 Options written......................................... 524 205 Balance Sheet Management: Interest rate contracts: Swap agreements......................................... 180 180 Options and caps purchased.............................. 30
- ------------------------------------------------------------------------------- 11 PART I. ITEM 1. FINANCIAL STATEMENTS (continued) Notes to Consolidated Financial Statements - State Street Corporation (Unaudited) Note M--Off-Balance Sheet Financial Instruments, Including Derivatives (continued) The following table represents the fair value as of June 30, 2000 and December 31, 1999 and average fair value for the six and twelve months then ended, respectively, for State Street's financial instruments held or issued for trading purposes: - --------------------------------------------------------------------------------
June 30, 2000 December 31, 1999 --------------- ------------------ Average Average Fair Fair Fair Fair (Dollars in millions) Value Value Value Value - -------------------------------------------------------------------------------- Foreign exchange contracts: Contracts in a receivable position.......... $ 1,102 $ 1,424 $ 1,160 $ 1,222 Contracts in a payable position............. 1,090 1,360 1,127 1,251 Other financial instrument contracts: Contracts in a receivable position.......... 24 31 40 19 Contracts in a payable position............. 12 13 7 4
- ------------------------------------------------------------------------------- The preceding amounts have been reduced by offsetting balances with the same counterparty where a master netting agreement exists. Contracts in a receivable position are reported in other assets in the Consolidated Statement of Condition and contracts in a payable position are reported in other liabilities. Credit-related financial instruments include indemnified securities on loan, commitments to extend credit or purchase assets, standby letters of credit and letters of credit. The maximum credit risk associated with credit-related financial instruments is measured by the contractual amounts of these instruments. The following is a summary of the contractual amount of State Street's credit-related, off-balance sheet financial instruments: - --------------------------------------------------------------------------------
June 30, December 31, (Dollars in millions) 2000 1999 - -------------------------------------------------------------------------------- Indemnified securities on loan............................ $ 97,992 $ 77,352 Loan commitments.......................................... 12,074 10,404 Asset purchase agreements................................. 5,813 3,585 Standby letters of credit................................. 3,859 3,128 Letters of credit......................................... 268 171
- ------------------------------------------------------------------------------- On behalf of its customers, State Street lends their securities to creditworthy brokers and other institutions. In certain circumstances, State Street may indemnify its customers for the fair market value of those securities against a failure of the borrower to return such securities. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 102% of the fair market value of the securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. State Street held, as collateral, cash and U.S. government securities totaling $101.4 billion and $79.7 billion for indemnified securities on loan at June 30, 2000 and December 31, 1999, respectively. Loan commitments, asset purchase agreements, standby letters of credit and letters of credit are subject to the same credit policies and reviews as loans. The amount and nature of collateral is obtained based upon management's assessment of the credit risk. Approximately 87% of the loan commitments and asset purchase agreements will expire in one year or less from the date of issue. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. 12 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, 2000, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2000 and 1999, and the consolidated statements of cash flows and changes in stockholders' equity for the six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Corporation's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated statement of condition of State Street Corporation as of December 31, 1999 (presented herein), and the related consolidated statements of income, cash flows and changes in stockholders' equity for the year then ended (not presented herein), and in our report dated January 18, 2000, we expressed an unqualified opinion on those consolidated financial statements. Ernst & Young LLP Boston, Massachusetts July 18, 2000 13 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Summary Earnings per share for the second quarter were $.90 on a diluted basis, an increase of 20% from $.75 in the second quarter of 1999. Revenue grew 15% from $773 million to $886 million. Net income was $148 million, up 20% from $123 million a year ago. Return on stockholders' equity was 20.9%. Condensed Income Statement--Taxable Equivalent Basis - -------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ------------------------- (Dollars in millions, except per share data) 2000 1999 Change % 2000 1999 Change % - ------------------------------------------------------------------------------- Fee revenue: Fiduciary compensation: Services for Institutional Investors............... $ 362 $ 288 $ 74 26 $ 711 $ 563 $ 148 26 Investment Management.... 131 144 (13) (9) 312 277 35 13 ----- ----- ---- --- ------ ------ ----- --- Total fiduciary compensation........... 493 432 61 15 1,023 840 183 22 Foreign exchange trading.. 101 69 32 46 207 163 44 27 Servicing and processing.. 57 56 1 1 119 101 18 17 Other..................... 5 18 (13) (74) 12 23 (11) (49) ----- ----- ---- --- ------ ------ ----- --- Total fee revenue....... 656 575 81 14 1,361 1,127 234 21 Net interest revenue....... 232 202 30 15 460 405 55 14 Provision for loan losses.. 2 4 (2) (38) 5 8 (3) (38) ----- ----- ---- --- ------ ------ ----- --- Total revenue........... 886 773 113 15 1,816 1,524 292 19 Operating expenses......... 642 577 65 11 1,326 1,134 192 17 ----- ----- ---- --- ------ ------ ----- --- Income before income taxes.................. 244 196 48 24 490 390 100 26 Income taxes............... 79 65 14 22 160 128 32 24 Taxable equivalent adjustment................ 17 8 9 110 33 17 16 90 ----- ----- ---- --- ------ ------ ----- --- Net income.............. $ 148 $ 123 $ 25 20 $ 297 $ 245 $ 52 22 ===== ===== ==== === ====== ====== ===== === Earnings Per Share Basic..................... $ .92 $ .77 $.15 19 $ 1.85 $ 1.52 $ .33 22 Diluted................... .90 .75 .15 20 1.82 1.49 .33 22
- ------------------------------------------------------------------------------- (Percentage change based on dollars in thousands, except per share data) Total Revenue In the second quarter, total revenue was $886 million, up $113 million, or 15%, from a year ago, reflecting strong business growth. This growth was partially offset by the contribution of businesses to CitiStreet, LLC ("CitiStreet"), a joint venture with Citigroup formed on April 4, 2000, and the sale of the commercial banking business in October 1999. When adjusted for the businesses contributed to CitiStreet, State Street's share of which is accounted for using the equity method of accounting, total revenue growth for the second quarter of 2000 would have been 21% and operating expense growth would have been 20%, compared to the second quarter of 1999. 14 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Fee Revenue Fee revenue for the second quarter of 2000 was $656 million, up $81 million, or 14%, over 1999 and accounted for 74% of total revenue. Fee revenue growth came principally from strong growth in State Street's core fiduciary compensation revenue and foreign exchange trading revenue. Fiduciary compensation is the largest component of fee revenue and is derived from accounting, custody, daily pricing, information services, securities lending, trusteeship services and investment management. Fiduciary compensation was $493 million, up 15% from a year ago. The increase reflected continued business growth for Services for Institutional Investors and Investment Management, partially offset by the contribution of businesses to CitiStreet. Second quarter fiduciary compensation for Services for Institutional Investors was $362 million, up 26% from the second quarter of 1999. Revenue growth from servicing mutual funds in the U.S. was driven by growth in mutual fund assets, especially global assets, including expanding relationships with existing customers. Total mutual fund assets under custody as of June 30, 2000, were $2.8 trillion, up 16% over the prior year. Revenue from servicing U.S. pension plans increased, reflecting new business with new and existing clients, and customers' use of State Street's global securities lending services. New clients include business gained from the acquisition of Wachovia's institutional trust and custody business in the fourth quarter of 1999. Revenue from serving institutional investors outside the United States increased for the quarter, primarily due to new business from both new and existing customers. Assets under custody for customers outside the U.S. were $541 billion, an increase of 28% from the prior year. At quarter end, total assets under custody totaled $6.1 trillion, up 15% from a year earlier. Fiduciary compensation for investment management was $131 million, down 9% from 1999. The decrease in revenue reflected the contribution of retirement investment services businesses and the total outsourcing business of Wellspring Resources, LLC, ("Wellspring") to CitiStreet. Joint venture accounting reduced Investment Management revenue in the second quarter. Adjusted for CitiStreet, retained revenue for this line of business was up 24%. Revenue from retained investment management business for institutional investors reflected new business and expanding relationships with existing customers. Customers' use of fixed income strategies, including money markets, and U.S. and global indexed equity strategies, drove revenue growth. Assets under management grew to $729 billion, up 27% from a year earlier. Foreign exchange trading revenue was $101 million, compared to $69 million a year ago. Foreign exchange trading revenue reflects three factors: the number of customers doing business with State Street, the volume of cross-border transactions and currency volatility. Currency volatility increased in State Street's most-traded currencies. Trading volumes were strong; both the number and total dollar value of transactions increased substantially from the second quarter of last year. State Street has foreign exchange trading relationships with almost 850 investment managers. Over 250 managers are using State Street Global Link(R), an e-finance platform. Servicing and processing revenue for the second quarter was $57 million compared to $56 million in the second quarter of 1999. Prior period results included on-going revenue from a non-strategic business unit sold at the end of the second quarter of 1999. Developing businesses continue to grow according to plan. Other fee revenue consists of gains and losses on securities, trading account profits and losses, and miscellaneous gains and fees. Other fee revenue for the second quarter was $5 million, compared to $18 million a year ago. The prior year revenue reflects the gain on the sale of a non-strategic business. Net Interest Revenue Taxable-equivalent net interest revenue for the second quarter was $232 million, up 15% from $202 million a year ago. In serving institutional investors worldwide, State Street provides short-term funds management, 15 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) including deposit services and repurchase agreements for cash positions associated with customers' investment activities. The revenue associated with deposit services and repurchase agreements, as well as from lending and lease financing activities, is recorded as net interest revenue. Growth in net interest revenue was driven by increased customer volumes, especially in non- U.S. deposits and repurchase agreements, and higher rates worldwide. Average non-U.S. deposits increased $4.5 billion, or 23%, from the same quarter last year, and average securities sold under repurchase agreements increased $1.5 billion, or 9%, over the prior year. Net interest margin, which is defined as taxable-equivalent net interest revenue as a percent of average interest-earning assets, increased from 1.61% in the second quarter 1999 to 1.68% in the second quarter of 2000 due to higher interest rates worldwide and increasing interest rate spreads. - --------------------------------------------------------------------------------
Three Months Ended June 30, ---------------------------- 2000 1999 ------------- ------------- Average Average (Dollars in millions) Balance Rate Balance Rate - -------------------------------------------------------------------------------- Interest-earning assets........................... $ 55,706 5.67% $ 50,274 4.93% Interest-bearing liabilities...................... 47,938 4.64 43,617 3.83 ---- ---- Excess of rate earned over rate paid............. 1.03% 1.11% ==== ==== Net interest margin.............................. 1.68% 1.61% ==== ====
- ------------------------------------------------------------------------------- Operating Expenses Operating expenses for the quarter were $642 million, up 11% from the second quarter of 1999. The increase reflects higher performance-based incentive compensation and investments for new products, efficiency initiatives and global expansion, offset by the CitiStreet transaction in the second quarter of 2000. Salaries and employee benefits were $366 million in the second quarter, up 13% from last year, primarily due to increased performance-based incentive compensation. The growth in performance-based incentive compensation reflects State Street's strong financial results in the quarter and the year-over-year growth in the stock price, partially offset by the transfer of 1,400 employees to CitiStreet. As of the second quarter of 2000, 48% of employees participate in performance-based compensation programs. Transaction processing services expense was $66 million in the second quarter, up 16% from last year, reflecting increased business volumes. Other expense, which includes professional services, advertising, sales promotion and other expenses, was $87 million, up 12% from the second quarter of 1999. The primary driver of the increase was professional fees for information technology and other initiatives. Income Taxes Taxes for the second quarter were $79 million, up from $65 million a year ago. The effective tax rate for the quarter was 34.9%, compared to 34.4% in the second quarter of the prior year. The rate increase reflects continued growth of fully taxable income. 16 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Credit Quality At June 30, 2000, total loans (gross of allowance for loan losses) were $5.4 billion. At quarter end, the allowance for loan losses was $53 million, a decrease from $88 million a year ago, reflecting the sale of the commercial banking business in the fourth quarter of 1999. During the quarter ended June 30, 2000, recoveries were less than $1 million and the provision for loan losses charged against income was $2 million. At June 30, 2000, non-performing loans were $7 million, compared to $7 million in the prior quarter and down from $17 million a year ago. Lines of Business Following is a summary of line of business operating results for the six months ended June 30: - --------------------------------------------------------------------------------
Services for Investment Divestiture Institutional Investors Management Business Taxable equivalent basis ------------------------ ------------ ------------- (Dollars in millions) 2000 1999 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Fee revenue: Fiduciary compensation.......... $ 711 $ 563 $ 312 $ 277 Foreign exchange trading............... 207 163 Other.................. 77 74 54 36 $ 14 ----------- ----------- ----- ----- ------ Total fee revenue..... 995 800 366 313 14 Net interest revenue.... 409 331 46 22 44 ----------- ----------- ----- ----- ------ Total revenue......... 1,404 1,131 412 335 58 Operating expense....... 1,005 830 321 273 31 ----------- ----------- ----- ----- ------ Income before income taxes................ $ 399 $ 301 $ 91 $ 62 $ 27 =========== =========== ===== ===== ====== Pretax margin........... 28% 27% 22% 18% 47% Average assets (billions)............. $ 59.1 $ 49.5 $ 1.7 $ 1.2 $ 2.3
- ------------------------------------------------------------------------------- Services for Institutional Investors. Services for Institutional Investors includes accounting, custody, daily pricing, and information services. Customers around the world include mutual funds and other collective investment funds, corporate and public pension plans, corporations, investment managers, not-for-profit organizations, unions, and other holders of investment assets. Institutional investors are offered State Street services, including foreign exchange, cash management, securities lending, fund administration, recordkeeping, banking services, and deposit and short-term investment facilities. These services support institutional investors in developing and executing their strategies, enhancing their returns, and evaluating and managing risk. Revenue from this line of business comprised 77% of State Street's total revenue for the six months ended June 30, 2000. Total revenue for the six months ended June 30, 2000, increased to $1.4 billion, up 24% from $1.1 billion reported for the first six months of 1999. The increase in revenue primarily reflected expanding relationships with existing customers. Fee revenue was up $195 million, or 24%, due to growth in fiduciary compensation and foreign exchange trading revenue. Fiduciary compensation, up 26%, reflected revenue growth from accounting, custody, securities lending, U.S. pension plans and customers outside the United States. Foreign exchange trading revenue grew 27% from a year ago and reflects the number of customers doing business with State Street, the volume of cross- border transactions and currency volatility. Volatility within the currency markets most-traded by State Street and trading volumes are higher, year over year. Net interest revenue, up 24%, reflected balance sheet growth from the increased use of securities sold under repurchase agreements and non-U.S. deposits by institutional investors. 17 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Operating expenses for the six months ended June 30, 2000 were $1.0 billion, 21% higher than a year ago, due to higher performance-based compensation, higher transaction processing expenses reflecting increased business volumes, and investments for new products, efficiency initiatives and global expansion. Income before income taxes was $399 million, an increase of $98 million, or 33%, from 1999. Investment Management. State Street manages financial assets worldwide for both institutions and individuals and provides related services, including participant services for defined contribution and other employee benefit programs, and brokerage services. Investment management offers a broad array of services, including passive and active equity, money market, and fixed income strategies. Revenue from this line of business comprised 23% of State Street's total revenue for the six months ended June 30, 2000. Revenue for the six months ended June 30, 2000, increased to $412 million, up $77 million, or 23%, from $335 million reported for the first six months of 1999. Fiduciary compensation for the first six months of 2000 grew 13%, to $312 million. Adjusted for CitiStreet, growth in fiduciary compensation from retained business was up 31% due to growth across all services, primarily investment management for institutional investors, reflecting new business and expanding relationships with existing customers, including customers' use of U.S and global equity and fixed income strategies. Revenue was also driven by strong performance in the equity brokerage business. Operating expenses of $321 million increased $48 million, or 17%, for the first six months of 2000, reflecting higher performance-based compensation, higher transaction processing expenses due to increased business volumes, and investments for new products, efficiency initiatives and global expansion. The growth in expense was partially offset by the transfer of 1,400 employees to CitiStreet in early April. Income before income taxes for the first six months of 2000 was $91 million, an increase of $29 million, or 48%, from the first six months of 1999. Business Divestiture. Historical operating results for the commercial banking business are contained in this caption. On October 1, 1999, State Street completed the sale of this business, which consisted of a $2.4 billion loan portfolio, a $36 million allowance for loan losses and $1.1 billion in deposits. The historical revenues and expenses of this business include allocations of other items in accordance with existing methodologies for line of business presentation. Joint Venture In April 2000, State Street Corporation and Citigroup formed CitiStreet, LLC. Jointly owned (50/50), CitiStreet provides administrative, outsourcing, investment management, employee communication and education, one-on-one counseling and investment advisory services to the employee benefit plans of corporate, governmental, healthcare and not-for-profit organizations. Under the terms of the joint venture agreement, State Street contributed its retirement investment services businesses and Wellspring, the company's total benefits outsourcing subsidiary. This transaction reduced total revenue in the second quarter of 2000, and reduced expenses by a slightly lesser amount. Liquidity and Capital Liquidity. The primary objective of State Street's liquidity management is to ensure that the Corporation has sufficient funds to meet its commitments and business needs, and to accommodate the transaction and cash management requirements of its customers. Liquidity is provided by State Street's access to global debt markets, its ability to gather additional deposits from its customers, maturing short-term assets, the sale of securities and payment of loans. Customer deposits and other funds provide a multi-currency, geographically diverse source of liquidity. State Street maintains a large portfolio of liquid assets. As of June 30, 2000, the Corporation's liquid assets were 86% of total assets. 18 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) On April 11, 2000, State Street filed a universal shelf registration statement to increase the amount available for issuance of unsecured debt from $200 million to $1 billion. The shelf registration statement allows for the offering and sale of unsecured debt securities, capital securities, common stock, depositary shares and preferred stock, and warrants to purchase such securities, including any shares into which the preferred stock or depositary shares may be convertible. On June 15, 2000, State Street issued $300 million in subordinated notes due 2010. The subordinated notes have a fixed interest rate of 7.65%, and are not secured and will rank junior to State Street's senior indebtedness and its other financial obligations. Capital. State Street's objective is to maintain a strong capital base in order to provide financial flexibility for its business needs, including funding corporate growth and customers' cash management needs. As a state- chartered bank and member of the Federal Reserve System, State Street Bank, State Street's principal subsidiary, is regulated by the Federal Reserve Board, which has established guidelines for minimum capital ratios. State Street has developed internal capital adequacy policies to ensure that State Street Bank meets or exceeds the level required for the "well capitalized" category, the highest of the Federal Reserve Board's five capital categories. State Street's capital management emphasizes risk exposure rather than asset levels. At June 30, 2000, State Street Bank's Tier 1 risk-based capital ratio was 12.6% and the Corporation's Tier 1 risk-based capital ratio was 13.8%. Both significantly exceed the regulatory minimum of 4%. See Note H to the Consolidated Financial Statements for further information. State Street's Board of Directors has authorized the purchase of State Street common stock for use in employee benefit programs and for general corporate purposes. State Street purchased 400,000 shares in the first six months of 2000 as part of the stock purchase program. As of June 30, 2000, an additional 2.6 million shares may be purchased within the stock purchase program. There were an additional 19,000 shares acquired during the first six months of 2000 for other deferred compensation plans that are not part of the stock purchase program. Trading Activities: Foreign Exchange and Interest Rate Sensitivity As part of its trading activities, the Corporation assumes positions in both the foreign exchange and interest rate markets by buying and selling cash instruments and using financial derivatives, including forward foreign exchange contracts, foreign exchange and interest rate options, and interest rate swaps. As of June 30, 2000, the notional amount of these derivative instruments was $173.1 billion, of which $161.4 billion was foreign exchange forward contracts. Long and short foreign exchange forward positions are closely matched to minimize currency and interest rate risk. All foreign exchange contracts are valued daily at current market rates. The Corporation uses a variety of risk measurement and estimation techniques, including value at risk. Value at risk is an estimate of potential loss for a given period of time within a stated statistical confidence interval. State Street uses a sophisticated risk management system, known as Askari RiskBook(R), to estimate value at risk daily for all material trading positions. The Corporation has adopted standards for estimating value at risk, and maintains capital for market risk, in accordance with the Federal Reserve's Capital Adequacy Guidelines for market risk. Value at risk is estimated for a 99% one-tail confidence interval and an assumed one-day holding period using a historical observation period of greater than one year. A 99% one-tail confidence interval implies that daily trading losses should not exceed the estimated value at risk more than 1% of the time, or approximately three days out of the year. The methodology uses a simulation approach based on observed changes in interest rates and foreign exchange rates and takes into account the resulting diversification benefits provided from the mix of the Corporation's trading positions. Like all quantitative measures, value at risk is subject to certain limitations and assumptions inherent to the methodology. State Street's methodology gives equal weight to all market rate observations regardless of how 19 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) recently the market rates were observed. The estimate is calculated using static portfolios consisting of positions held at the end of the trading day. Implicit in the estimate is the assumption that no intraday action is taken by management during adverse market movements. As a result, the methodology does not represent risk associated with intraday changes in positions or intraday price volatility. The following table presents State Street's market risk for its trading activities as measured by its value at risk methodology: Value at Risk for the six months ended June 30, - --------------------------------------------------------------------------------
(Dollars in millions) Average Maximum Minimum - -------------------------------------------------------------------------------- 2000: Foreign exchange contracts............................. $ 1.0 $ 2.1 $ .4 Interest rate contracts................................ 3.8 5.3 3.1 1999: Foreign exchange contracts............................. 1.8 3.7 .8 Interest rate contracts................................ .2 .5
- ------------------------------------------------------------------------------- State Street compares actual daily profit and losses from trading activities to estimated one-day value at risk. During the first six months of 2000, State Street did not experience any one-day trading loss in excess of its end of day value at risk estimate. Financial Goals and Factors That May Affect Them State Street's primary financial goal is sustainable real growth in earnings per share. The Corporation has two supporting goals, one for total revenue and one for return on common stockholder's equity (ROE). The long-term revenue goal is for a 12.5% real, or inflation adjusted, compound annual growth rate of revenue from 1990 through 2010. This equates to approximately a 15% nominal compound annual growth rate. The annual ROE goal is 18%. State Street considers these to be financial goals, not projections or forward-looking statements. However, the discussion included in Management's Discussion and Analysis of Financial Condition and Results of Operations, and in other portions of this report on Form 10-Q, does contain statements that are considered "forward-looking statements" within the meaning of the federal securities laws. These statements may be identified by such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will," or similar statements or variations of such terms. The Corporation's financial goals and such forward-looking statements involve certain risks and uncertainties, including the issues and factors listed below and factors further described in conjunction with the forward-looking information, which could cause actual results to differ materially. Factors that may cause such differences include, but are not limited to, the factors discussed in this section and elsewhere in this Form 10-Q. Each of these factors, and others, are also discussed from time to time in the Corporation's other filings with the Securities and Exchange Commission, including in the Corporation's Form 10-K. Based on evaluation of the following factors, management is currently optimistic about the Corporation's long-term prospects. Cross-border investing. Increases in cross-border investing by customers worldwide benefit State Street's revenue. Future revenue may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by customers or future customers. 20 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Savings rate of individuals. State Street benefits from the savings of individuals that are invested in mutual funds or in defined contribution plans. Changes in savings rates or investment styles may affect revenue. Value of worldwide financial markets. As worldwide financial markets increase or decrease in value, State Street's opportunities to invest and service financial assets may change. Since a portion of the Corporation's fees are based on the value of assets under custody and management, fluctuations in worldwide securities market valuations will affect revenue. Dynamics of markets served. Changes in markets served, including the growth rate of U.S. mutual funds, the pace of debt issuance, outsourcing decisions, and mergers, acquisitions and consolidations among customers and competitors, can affect revenue. In general, State Street benefits from an increase in the volume of financial market transactions serviced. State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation's business, including volatile currencies and changes in monetary policy, and social and political instability, could affect results of operations. Interest rates. Market interest rate levels, the shape of the yield curve and the direction of interest rate changes affect net interest revenue as well as fiduciary compensation from securities lending. All else being equal, in the short term, State Street's net interest revenue benefits from falling interest rates and is negatively affected by rising rates because interest- bearing liabilities reprice sooner than interest-earning assets. In general, sustained lower interest rates have a constraining effect on the net interest revenue growth rate. Volatility of currency markets. The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility. Pace of pension reform. State Street expects to benefit from worldwide pension reform that creates additional pools of assets that use custody and related services and investment management services. The pace of pension reform and resulting programs including public and private pension schemes may affect the pace of revenue growth. Pricing/competition. Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors' activities and the introduction of new products into the marketplace. Pace of new business. The pace at which existing and new customers use additional services and assign additional assets to State Street for management or custody will affect future results of operations. Business mix. Changes in business mix, including the mix of U.S. and non- U.S. business, may affect future results of operations. Rate of technological change. Technological change creates opportunities for product differentiation and reduced costs, as well as the possibility of increased expenses. Developments in the securities processing industry, including shortened settlement cycles and ultimately straight-through- processing, will result in changes to existing procedures. Alternative delivery systems have emerged, including the widespread utilization of the internet. State Street's financial performance depends in part on its ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate State Street's products or provide cost efficiencies. There are risks inherent in this process. These include rapid technological change in the industry, the Corporation's ability to access technical and other information from customers, and the significant and ongoing 21 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) investments required to bring new services to market in a timely fashion at competitive prices. Further, there is risk that competitors may introduce services that could replace or provide lower-cost alternatives to State Street services. State Street uses appropriate trademark, trade secret, copyright and other proprietary rights procedures to protect its technology, and has applied for a limited number of patents in connection with certain software programs. The Corporation believes that patent protection is not a significant competitive factor and that State Street's success depends primarily upon the technical expertise and creative abilities of its employees, and the ability of the Corporation to continue to develop, enhance and market its innovative business processes and systems. However, in the event a third party asserts a claim of infringement of its proprietary rights, obtained through patents or otherwise, against the Corporation, State Street may be required to spend significant resources to defend against such claims, develop a non-infringing program or process, or obtain a license to the infringed process. Acquisitions and alliances. Acquisitions of complementary businesses and technologies, and development of strategic alliances are an active part of State Street's overall business strategy. The Corporation has completed several acquisitions and alliances in recent years. However, there can be no assurance that services, technologies, key personnel and businesses of acquired companies will be effectively assimilated into State Street's business or service offerings or that alliances will be successful. Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 may cause changes in the competitive environment in which State Street operates. Such changes could include, among other things, broadening the scope of activities of significant competitors, or facilitating consolidation of competitors into larger, better capitalized companies, offering a wide array of financial services and products; and attracting large and well-capitalized financial services companies into activities not previously undertaken but competitive to the Corporation's traditional businesses. In addition, the Corporation's ability to engage in new activities may expose it to business risks with which it has less experience than it has with the business risks associated with its traditional businesses. Such changes and the ability of the Corporation to address and adapt to the regulatory and competitive challenges may effect future results of operations. 22 PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See information under the caption "Trading Activities: Foreign Exchange and Interest Rate Sensitivity" on page 19. PART II -- Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Index
Exhibit Number Page of this Report ------- ------------------- 10.1 Amendment to the 1994 Stock Option and Performance Unit Plan........................... 25 10.2 Amendment to the 1997 Equity Incentive Plan..... 26 12 Ratio of Earnings to Fixed Charges.............. 27 15 Letter regarding unaudited interim financial information..................................... 28 27 Financial data schedule......................... 29
(b) Current Reports on Form 8-K None 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. State Street Corporation Date: August 8, 2000 /s/ Ronald L. O'Kelley By: _________________________________ Ronald L. O'Kelley Executive Vice President and Chief Financial Officer Date: August 8, 2000 /s/ Frederick P. Baughman By: _________________________________ Frederick P. Baughman Senior Vice President, Controller and Chief Accounting Officer 24 EX-10.1 2 0002.txt AMENDMENT TO THE 1994 STOCK OPTION PLAN Exhibit 10.1 AMMENDMENT NO. 3 STATE STREET CORPORATION 1994 STOCK OPTION AND PERFORMANCE UNIT PLAN Amendment No. 3 to the State Street Corporation 1994 Stock Option and Performance Unit Plan (the "Plan"). RECITAL The Board of Directors of State Street Corporation have approved the following amendment to the Plan: 1. Section 16.G. of the Plan is hereby amended by adding to the end thereof the following new sentence: The term "subsidiary" shall include such other entities (in which the Corporation has a direct or indirect ownership interest) as the Committee may from time to time designate, subject to such limitations and conditions as the Committee may specify. 2. The amendment of the Plan set forth above shall be effective July 1, 2000. 3. Except as amended above, the Plan remains in full force and effect. IN WITNESS WHEREOF, State Street Corporation has caused this instrument of amendment to be executed by its duly authorized officer this 28/th/ day of June, 2000. STATE STREET CORPORATION By: /s/ Trevor Lukes ---------------- Name: Trevor Lukes ------------ Title: Senior Vice President --------------------- EX-10.2 3 0003.txt AMENDMENT TO THE 1997 EQUITY INCENTIVE PLAN Exhibit 10.2 AMMENDMENT NO. 4 STATE STREET CORPORATION 1997 EQUITY INCENTIVE PLAN Amendment No. 4 to the State Street Corporation 1997 Equity Incentive Plan (the "Plan"). RECITAL The Board of Directors of State Street Corporation have approved the following amendment to the Plan: 1. Section 5 of the Plan is hereby amended by adding to the end thereof the following new sentence: The term "subsidiary" shall include such other entities (in which the Corporation has a direct or indirect ownership interest) as the Committee may from time to time designate, subject to such limitations and conditions as the Committee may specify. 2. The amendment of the Plan set forth above shall be effective July 1, 2000. 3. Except as amended above, the Plan remains in full force and effect. IN WITNESS WHEREOF, State Street Corporation has caused this instrument of amendment to be executed by its duly authorized officer this 28/th/ day of June, 2000. STATE STREET CORPORATION By: /s/ Trevor Lukes ---------------- Name: Trevor Lukes ------------ Title: Senior Vice President --------------------- EX-12 4 0004.txt RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 STATE STREET CORPORATION Ratio of Earnings to Fixed Charges - --------------------------------------------------------------------------------
Six months ended Year Ended December 31, June 30, ----------------------------------------- (Dollars in million) 2000 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- (A) Excluding interest on deposits: Earnings: Income before income taxes.................. $ 495 $ 974 $ 662 $ 568 $ 453 $ 370 Fixed charges........... 614 954 856 613 477 495 ------- ------- ------- ------- ------ ------ Earnings as adjusted... $ 1,109 $ 1,928 $ 1,518 $ 1,181 $ 930 $ 865 ======= ======= ======= ======= ====== ====== Income before income taxes Pretax income from continuing operations as reported ........... $ 490 $ 968 $ 657 $ 564 $ 447 $ 366 Share of pretax income (loss) of 50% owned subsidiaries not included in above...... 5 6 5 4 6 4 ------- ------- ------- ------- ------ ------ Net income as adjusted.. $ 495 $ 974 $ 662 $ 568 $ 453 $ 370 ======= ======= ======= ======= ====== ====== Fixed charges: Interest on other borrowings............. $ 573 $ 874 $ 770 $ 548 $ 452 $ 482 Interest on long-term debt including amortization of debt issue costs............ 36 70 66 55 15 9 Portion of rents representative of the interest factor in long term lease............. 5 10 20 10 10 4 ------- ------- ------- ------- ------ ------ Fixed charges.......... $ 614 $ 954 $ 856 $ 613 $ 477 $ 495 ======= ======= ======= ======= ====== ====== Ratio of earnings to fixed charges.......... 1.81x 2.02x 1.77x 1.93x 1.95x 1.75x (B) Including interest on deposits: Adjusted earnings from (A) above.............. $ 1,109 $ 1,928 $ 1,518 $ 1,181 $ 930 $ 865 Add interest on deposits............... 458 712 656 512 425 416 ------- ------- ------- ------- ------ ------ Earnings as adjusted.... $ 1,567 $ 2,640 $ 2,174 $ 1,693 $1,355 $1,281 ======= ======= ======= ======= ====== ====== Fixed Charges: Fixed charges from (A) above.................. $ 614 $ 954 $ 856 $ 613 $ 477 $ 495 Interest on deposits.... 458 712 656 512 425 416 ------- ------- ------- ------- ------ ------ Adjusted fixed charges............... $ 1,072 $ 1,666 $ 1,512 $ 1,125 $ 902 $ 911 ======= ======= ======= ======= ====== ====== Adjusted earnings to adjusted fixed charges................ 1.46x 1.58x 1.44x 1.50x 1.50x 1.41x
- -------------------------------------------------------------------------------- EX-15 5 0005.txt LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15 STATE STREET CORPORATION Independent Accountant's Acknowledgment Letter The Stockholders and Board of Directors State Street Corporation We are aware of the incorporation of reference in Registration Statements (Forms S-8 Nos. 333-16979, 333-36409, 333-65281, 33-57359, 33-38672, 33-38671, 33-2882, 2-93157, 2-88641 and 2-68698) and in Post-Effective Amendment No. 2 to Registration Statement (Form S-8 No. 2-68696) pertaining to various stock option and benefit share plans, in Registration Statements (Form S-3 Nos. 333- 2143 and 33-49885) and in Post-Effective Amendment No. 1 to Registration Statement (Form S-3 No. 333-2143) and Registration Statements (Form S-3 Nos. 333-49143, 333-49143-01, 333-49143-02 and 333-49143-03 and Form S-3 Nos. 333- 34516, 333-34516-01, 333-34516-02 and 333-34516-03) pertaining to the registration of capital securities, debt securities and preferred stock of State Street Corporation, and in Registration Statement (Form S-3 No. 333- 16987) pertaining to the registration of Common Stock of State Street Corporation, of our report dated April 17, 2000 relating to the unaudited consolidated interim financial statements of State Street Corporation which are included in its Form 10-Q for the quarter ended June 30, 2000. Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. ERNST & YOUNG LLP Boston, Massachusetts August 8, 2000 EX-27 6 0006.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT AND FROM THE MANAGEMENT DISCUSSION AND ANALYSIS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND MANAGEMENT DISCUSSION. 1,000,000 6-MOS DEC-31-1999 JUN-30-2000 2,506 17,637 18,685 1,325 14,223 1,283 1,276 5,383 53 64,630 37,370 18,769 4,340 1,220 0 0 167 2,764 64,630 141 464 889 1,494 458 1,067 427 5 0 1,326 457 457 0 0 297 1.85 1.82 5.52 0 0 0 7 0 0 0 48 1 1 53
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