-----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, QoTt8Hoh2LqGxp0B5FwEdxtMPGQG+4OPXpRtfZoEBEk23SxVrDVL3dg6jEMav+YV QIJGxNnPIGG6b7si1O30fg== 0001047469-04-033234.txt : 20041105 0001047469-04-033234.hdr.sgml : 20041105 20041105161059 ACCESSION NUMBER: 0001047469-04-033234 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATE STREET CORP CENTRAL INDEX KEY: 0000093751 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042456637 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07511 FILM NUMBER: 041122978 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 a2145272z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q

(Mark One)  

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

or

o

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)

MASSACHUSETTS   04-2456637
(State or other jurisdiction
of incorporation)
  (I.R.S. Employer
Identification No.)

225 Franklin Street
Boston, Massachusetts
(Address of principal
executive office)

 

02110
(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 ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

The number of shares of the Registrant's Common Stock outstanding on October 31, 2004 was 333,410,769.




STATE STREET CORPORATION


Table of Contents

 
   
  Page
PART I. FINANCIAL INFORMATION    

Item 1.

 

Financial Statements

 

1

Consolidated Statements of Income

 

1

Consolidated Statement of Condition

 

3

Consolidated Statement of Changes in Stockholders' Equity

 

4

Consolidated Statement of Cash Flows

 

5

Notes to Consolidated Financial Statements

 

6

Report of Independent Registered Public Accounting Firm

 

23

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

Item 4.

 

Controls and Procedures

 

46

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

48

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

48

Item 6.

 

Exhibits

 

49

Signatures

 

50

Exhibit Index

 

51


PART I.
ITEM 1.    FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF INCOME—STATE STREET CORPORATION (UNAUDITED)

Three months ended September 30,
(Dollars in millions, except per share data)

  2004
  2003
 
Fee Revenue:              
Servicing fees   $ 568   $ 505  
Management fees     156     141  
Securities lending     48     61  
Foreign exchange trading     75     101  
Brokerage fees     31     28  
Processing fees and other     83     92  
   
 
 
Total fee revenue     961     928  

Net Interest Revenue:

 

 

 

 

 

 

 
Interest revenue     463     364  
Interest expense     250     161  
   
 
 
Net interest revenue     213     203  
Provision for loan losses          
   
 
 
Net interest revenue after provision for loan losses     213     203  

Losses on the sales of available-for-sale investment securities, net

 

 


 

 

(5

)
   
 
 

Total Revenue

 

 

1,174

 

 

1,126

 
Operating Expenses:              
Salaries and employee benefits     474     407  
Information systems and communications     127     140  
Transaction processing services     95     80  
Occupancy     88     84  
Merger and integration costs     16     26  
Restructuring costs         3  
Other     106     81  
   
 
 
Total operating expenses     906     821  
   
 
 

Income before income taxes

 

 

268

 

 

305

 
Income tax expense     91     103  
   
 
 
Net Income   $ 177   $ 202  
   
 
 

Earnings Per Share

 

 

 

 

 

 

 
Basic   $ .52   $ .61  
Diluted     .52     .60  

Average Shares Outstanding (in thousands)

 

 

 

 

 

 

 
Basic     335,626     332,246  
Diluted     339,348     336,568  

Cash Dividends Declared Per Share

 

$

..16

 

$

..14

 

The accompanying notes are an integral part of these financial statements.

1



CONSOLIDATED STATEMENT OF INCOME—STATE STREET CORPORATION (UNAUDITED)

Nine months ended September 30,
(Dollars in millions, except per share data)

  2004
  2003
Fee Revenue:            
Servicing fees   $ 1,693   $ 1,425
Management fees     456     396
Securities lending     201     192
Foreign exchange trading     309     276
Brokerage fees     112     85
Processing fees and other     248     225
   
 
Total fee revenue     3,019     2,599

Net Interest Revenue:

 

 

 

 

 

 
Interest revenue     1,255     1,162
Interest expense     613     562
   
 
Net interest revenue     642     600
Provision for loan losses        
   
 
Net interest revenue after provision for loan losses     642     600

Gains on the sales of available-for-sale investment securities, net

 

 

19

 

 

29
   
 

Total Revenue

 

 

3,680

 

 

3,228

Operating Expenses:

 

 

 

 

 

 
Salaries and employee benefits     1,446     1,294
Information systems and communications     396     410
Transaction processing services     294     231
Occupancy     262     231
Merger and integration costs     50     81
Restructuring costs         295
Other     319     252
   
 
Total operating expenses     2,767     2,794
   
 

Income before income taxes

 

 

913

 

 

434
Income tax expense     299     159
   
 
Net Income   $ 614   $ 275
   
 

Earnings Per Share

 

 

 

 

 

 
Basic   $ 1.83   $ .83
Diluted     1.80     .82

Average Shares Outstanding (in thousands)

 

 

 

 

 

 
Basic     335,065     331,056
Diluted     340,529     334,160

Cash Dividends Declared Per Share

 

$

..47

 

$

..41

The accompanying notes are an integral part of these financial statements.

2


CONSOLIDATED STATEMENT OF CONDITION—STATE STREET CORPORATION

(Dollars in millions)

  September 30,
2004

  December 31,
2003

 
 
  (Unaudited)

  (Note 1)

 
Assets              
Cash and due from banks   $ 6,058   $ 3,376  
Interest-bearing deposits with banks     30,392     21,738  
Securities purchased under resale agreements     10,378     9,447  
Federal funds sold     2,700     104  
Trading account assets     673     405  
Investment securities (including securities pledged of $17,998 and $14,176)     36,818     38,215  
Loans (less allowance of $36 and $61)     5,512     4,960  
Premises and equipment     1,431     1,212  
Accrued income receivable     1,085     1,015  
Goodwill     1,462     1,326  
Other intangible assets     466     525  
Other assets     3,552     5,211  
   
 
 
Total Assets   $ 100,527   $ 87,534  
   
 
 

Liabilities

 

 

 

 

 

 

 
Deposits:              
Noninterest-bearing   $ 9,793   $ 7,893  
Interest-bearing—U.S.     6,093     5,062  
Interest-bearing—Non-U.S.     42,043     34,561  
   
 
 
Total deposits     57,929     47,516  

Securities sold under repurchase agreements

 

 

20,702

 

 

22,806

 
Federal funds purchased     5,500     1,019  
Other short-term borrowings     1,881     1,437  
Accrued taxes and other expenses     2,513     2,424  
Other liabilities     3,415     4,363  
Long-term debt     2,436     2,222  
   
 
 
Total Liabilities     94,376     81,787  

Stockholders' Equity

 

 

 

 

 

 

 
Preferred stock, no par: authorized 3,500,000 shares; issued none
Common stock, $1 par: authorized 500,000,000 shares, issued 337,126,000 and 337,132,000
    337     337  
Surplus     287     329  
Retained earnings     5,463     5,007  
Accumulated other comprehensive income     86     192  
Treasury stock, at cost (576,000 and 2,658,000 shares)     (22 )   (118 )
   
 
 
Total Stockholders' Equity     6,151     5,747  
   
 
 
Total Liabilities and Stockholders' Equity   $ 100,527   $ 87,534  
   
 
 

The accompanying notes are an integral part of these financial statements.

3



CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY—STATE STREET CORPORATION (UNAUDITED)

 
  Common Stock
   
   
  Accumulated
Other
Comprehensive
(Loss) Income

  Treasury Stock
   
 
(Dollars in millions, shares in thousands)

   
  Retained
Earnings

   
 
  Shares
  Amount
  Surplus
  Shares
  Amount
  Total
 
Balance at December 31, 2002   329,992   $ 330   $ 104   $ 4,472   $ 106   5,065   $ (225 ) $ 4,787  
Comprehensive income:                                              
Net income                     275                     275  
Change in net unrealized gains/losses on available-for sale securities, net of related taxes of $(30)                           (39 )             (39 )
Foreign currency translation, net of related taxes of $29                           58               58  
Change in unrealized gains/losses on cash flow hedges, net of related taxes of $1                           1               1  
   
 
 
 
 
 
 
 
 
Total comprehensive income                     275     20               295  
Cash dividends declared-$.41 per share                     (137 )                   (137 )
Common stock acquired                               80     (3 )   (3 )
Common stock issued pursuant to:                                              
January 14, 2003, Registration Statement   7,153     7     260                           267  
Present value of the estimated fees payable with respect to SPACES, pursuant to January 14, 2003 Registration Statement               (57 )                         (57 )
Stock awards and options exercised, including tax benefit of $5   (10 )         6               (1,066 )   48     54  
Modified stock awards and options for restructuring               24               (266 )   12     36  
Debt conversion               (1 )             (21 )   1      
Other                               (54 )   2     2  
   
 
 
 
 
 
 
 
 
Balance at September 30, 2003   337,135   $ 337   $ 336   $ 4,610   $ 126   3,738   $ (165 ) $ 5,244  
   
 
 
 
 
 
 
 
 
Balance at December 31, 2003   337,132   $ 337   $ 329   $ 5,007   $ 192   2,658   $ (118 ) $ 5,747  
Comprehensive income:                                              
Net income                     614                     614  
Change in net unrealized gains/losses on available-for sale securities, net of related taxes of $(61)                           (85 )             (85 )
Change in minimum pension liability, net of related taxes of $(16)                           (23 )             (23 )
Foreign currency translation, including tax benefit of $(5)                           3               3  
Change in unrealized gains/losses on cash flow hedges, net of related taxes of $(1)                           (1 )             (1 )
   
 
 
 
 
 
 
 
 
Total comprehensive income                     614     (106 )             508  
Cash dividends declared-$.47 per share                     (158 )                   (158 )
Common stock acquired                               45     (2 )   (2 )
Impact of fixing the variable-share settlement rate of SPACES               (26 )                         (26 )
Common stock issued pursuant to:                                              
Stock awards and options exercised, including tax benefit of $19   (6 )         (12 )             (2,023 )   94     82  
Debt conversion               (4 )             (104 )   4      
   
 
 
 
 
 
 
 
 
Balance at September 30, 2004   337,126   $ 337   $ 287   $ 5,463   $ 86   576   $ (22 ) $ 6,151  
   
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these financial statements.

4


CONSOLIDATED STATEMENT OF CASH FLOWS—STATE STREET CORPORATION (UNAUDITED)

Nine months ended September 30,
(Dollars in millions)

  2004
  2003
 
Operating Activities              
Net income   $ 614   $ 275  
Adjustments to reconcile net income to net cash provided by operating activities:              
Non-cash charges for depreciation, amortization, and deferred income taxes     536     425  
Securities gains, net     (19 )   (29 )
Change in trading account assets, net     (268 )   (75 )
Other, net     613     (166 )
   
 
 
Net Cash Provided by Operating Activities     1,476     430  

Investing Activities

 

 

 

 

 

 

 
Net (increase) decrease in interest-bearing deposits with banks     (8,654 )   5,810  
Net (increase) decrease in federal funds sold and securities purchased under resale agreements     (3,527 )   8,478  
Net (increase) in loans     (515 )   (1,995 )
Proceeds from sales of available-for-sale securities     7,316     8,139  
Proceeds from maturities of available-for-sale securities     9,881     21,754  
Purchases of available-for-sale securities     (16,056 )   (35,575 )
Proceeds from maturities of held-to-maturity securities     803     1,047  
Purchases of held-to-maturity securities     (833 )   (1,054 )
Principal collected from lease financing, net of payments for non-recourse debt     29     24  
Business acquisitions, net of cash acquired     (71 )   (1,213 )
Purchases of equity investments and other long-term assets     (32 )   (23 )
Purchases of premises and equipment     (255 )   (229 )
   
 
 
Net Cash (Used) Provided by Investing Activities     (11,914 )   5,163  

Financing Activities

 

 

 

 

 

 

 
Net increase (decrease) in deposits     10,398     (2,330 )
Net increase (decrease) in short-term borrowings     2,821     (3,783 )
Proceeds from issuance of long-term debt, net of issuance costs         742  
Payments for long-term debt and obligations under capital leases     (6 )   (101 )
Proceeds from issuance of common stock/SPACES, net of issuance costs         257  
Purchase of common stock     (2 )   (3 )
Proceeds from issuance of treasury stock     63     87  
Payments for cash dividends     (154 )   (132 )
   
 
 
Net Cash Provided (Used) by Financing Activities     13,120     (5,263 )
   
 
 

Net Increase

 

 

2,682

 

 

330

 
Cash and due from banks at beginning of period     3,376     1,361  
   
 
 
Cash and Due From Banks at End of Period   $ 6,058   $ 1,691  
   
 
 

Non-cash transactions for the nine months ended September 30, 2004 and 2003 included $189 million and $220 million, respectively, of leases capitalized in property, plant and equipment, with a corresponding increase in long-term debt for those periods.

The accompanying notes are an integral part of these financial statements.

5



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATE STREET CORPORATION (UNAUDITED)

Note 1—Basis of Presentation

Organization and Nature of Operations

State Street Corporation ("State Street" or the "Corporation") is a financial holding company and reports two lines of business. Investment Servicing provides services for U.S. mutual funds, collective funds worldwide, corporate and public retirement plans, insurance companies, foundations, endowments, and other investment pools. Products include custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; recordkeeping; foreign exchange and trading services; securities lending; deposit and short-term investment facilities; loans and lease financing; investment operations outsourcing; wealth manager and hedge fund manager services; and performance, risk and compliance analytics to support institutional investors. Investment Management offers a broad array of services for managing financial assets, including investment management and investment research services, primarily for institutional investors worldwide; these services include passive and active U.S. and non-U.S. equity and fixed income strategies, and other related services, such as securities lending.

Basis of Presentation

In the opinion of management, all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the financial position of State Street and subsidiaries at September 30, 2004 and December 31, 2003, its cash flows for the nine months ended September 30, 2004 and 2003, and consolidated results of its operations for the three and nine months ended September 30, 2004 and 2003, have been made. Operating results for the three and nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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.

The Statement of Condition at December 31, 2003, has been developed from the audited financial statements at that date, but does not include all footnotes required by accounting principles generally accepted in the United States ("GAAP") for complete financial statements.

Principles of Consolidation

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"). All significant intercompany balances and transactions have been eliminated upon consolidation.

The assets and liabilities of non-U.S. operations are translated at month-end exchange rates, and revenue and expenses are translated at rates that approximate average monthly exchange rates. Gains or losses from the translation of the net assets of non-U.S. subsidiaries and branches, net of related taxes, are reported in accumulated other comprehensive (loss) income.

Use of Estimates

The preparation of financial statements in accordance with GAAP 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.

6



Investments in Affiliates

Investments in affiliates in which the Corporation has the ability to exercise significant influence, but not control, are accounted for using the equity method, unless the affiliate is determined to be a variable interest entity ("VIE") for which State Street absorbs the majority of expected losses, in which case State Street consolidates the VIE.

Revenue Recognition

Revenue recorded as servicing fees, management fees, securities lending fees, foreign exchange trading, brokerage fees and certain types of revenue recorded in processing fees and other is recognized when earned based on contractual terms and is accrued based on estimates, or is recognized as transactions occur or services are provided and collectibility is reasonably assured. Revenue on interest-earning assets is recognized based on the effective yield of the financial instrument.

Stock-Based Compensation

State Street expenses stock options using the fair value method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" using the prospective transition method afforded under SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment to SFAS No. 123. The following table illustrates the pro forma effect on net income and earnings per share as if the fair value method had been applied to all outstanding and unvested stock options in each period:

 
  Three Months Ended
September 30,

  Six Months Ended
September 30,

 
(Dollars in millions, except per share data)

 
  2004
  2003
  2004
  2003
 
Net income, as reported   $ 177   $ 202   $ 614   $ 275  
Add: Stock-based employee compensation expense included in reported net income, net of related taxes(1)     4         12     19  
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related taxes     (10 )   (6 )   (32 )   (47 )
   
 
 
 
 
Pro forma net income   $ 171   $ 196   $ 594   $ 247  
   
 
 
 
 
Earnings per share:                          
Basic—as reported   $ .52   $ .61   $ 1.83   $ .83  
Basic—pro forma     .51     .58     1.77     .74  
Diluted—as reported     .52     .60     1.80     .82  
Diluted—pro forma     .50     .58     1.74     .73  

(1)
State Street accelerated recognition of $29 million of stock option expense, $19 million after tax, in the second quarter of 2003 in connection with its restructuring. See Note 10 for further details.

7


Information related to option activity is as follows:

 
  Three Months
Ended September 30,

  Nine Months
Ended September 30,

 
  2004
  2003
  2004
  2003
Options exercised     730,000     394,000     1,648,000     873,000
Weighted average price of options exercised   $ 15.12   $ 31.70   $ 23.09   $ 24.26
Options granted     18,000     4,211,000     2,267,000     4,271,000
Weighted average price of options granted   $ 45.18   $ 45.12   $ 52.64   $ 45.01

Reclassification

Certain previously reported amounts have been reclassified to conform to the current method of presentation.

Accounting Changes and Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). As a result of this Interpretation, State Street deconsolidated the trusts that issued trust preferred capital securities in the fourth quarter of 2003. In December 2003, the FASB issued a revised version of FIN 46 ("FIN 46-R") that deferred the effective date of the Interpretation as it related to certain types of variable interest entities until March 31, 2004. The adoption of FIN 46-R as of March 31, 2004, did not materially impact either the financial position or results of operations of the Corporation.

Note 2—Acquisitions and Divestitures

 On October 31, 2003, State Street completed the sale of its Private Asset Management business to U.S. Trust. Under the terms of the agreement, the transaction was valued at $365 million, about five percent of which is subject to the successful transition of the business over the subsequent 16 months.

On January 31, 2003, State Street completed the primary closing of its acquisition of a substantial part of the Global Securities Services ("GSS") business of Deutsche Bank AG ("Deutsche Bank") for a premium of $1.10 billion. In July 2003, separate closings were held for the GSS business units in Italy and Austria, upon receipt of regulatory approvals. Under the terms of the sale and purchase agreement, State Street could have been required to make contingent additional purchase price payments. During the second quarter of 2004, State Street and Deutsche Bank determined that under the terms of the sale and purchase agreement, no additional consideration is payable by State Street.

In connection with the acquisition, approximately 2,800 employees of Deutsche Bank became employees of State Street. For the three and nine months ended September 30, 2004, State Street paid $3 million and $10 million, respectively, of severance costs related to an overall GSS workforce reduction, primarily in the U.S. The severance liability outstanding was $9 million as of September 30, 2004.

In January 2003, the Corporation issued equity, equity-related and capital securities under an existing shelf registration statement. State Street issued $283 million, or 7,153,000 shares of common stock, $345 million, or 1,725,000 units of SPACESsm, and $345 million of floating-rate, medium-term capital securities due 2008. Proceeds, net of issuance costs, of $595 million from these security issuances were used to partially

8



finance the acquisition of the GSS business. The remainder of the purchase price was financed using existing resources.

State Street receives payments from Deutsche Bank representing amounts earned on client deposits of the GSS business that have not yet converted to State Street. For the three months ended September 30, 2004 and 2003, payments of $8 million and $29 million, respectively, were included in processing fees and other revenue in the Consolidated Statement of Income. For the nine months ended September 30, 2004 and 2003, payments of $41 million and $76 million, respectively, were included in processing fees and other revenue. Once converted, GSS deposits will be reflected as deposits on State Street's Consolidated Statement of Condition and the related earnings on those deposits will be included in net interest revenue.

In July 2002, State Street completed the purchase of International Fund Services, a leading provider of fund accounting and administration as well as securities trade support and operational services for hedge funds. In connection with this transaction, an additional $60 million of the purchase price was recorded as goodwill during the second quarter of 2004 based upon certain performance measures with payment made in the third quarter of 2004. Final settlement, which will occur in 2005, could require State Street to make another payment of up to $60 million.

Note 3—Investment Securities

 Available-for-sale securities and held-to-maturity securities consisted of the following as of the dates indicated:

 
  September 30, 2004
  December 31, 2003
 
   
  Unrealized
   
   
  Unrealized
   
(Dollars in millions)

  Amortized
Cost

  Fair
Value

  Amortized
Cost

  Fair
Value

  Gains
  Losses
  Gains
  Losses
Available for sale:                                                
U.S. Treasury and federal agencies   $ 21,896   $ 27   $ 85   $ 21,838   $ 22,695   $ 73   $ 20   $ 22,748
Asset-backed securities     9,416     17     17     9,416     9,852     46     13     9,885
State and political subdivisions     2,012     27         2,039     1,961     38         1,999
Collateralized mortgage obligations     1,170     1     4     1,167     1,338     2     7     1,333
Other debt investments     279     4         283     304     6         310
Money market mutual funds     98             98     85             85
Other equity securities     321     10     1     330     238     6     6     238
   
 
 
 
 
 
 
 
Total   $ 35,192   $ 86   $ 107   $ 35,171   $ 36,473   $ 171   $ 46   $ 36,598
   
 
 
 
 
 
 
 
Held to maturity:                                                
U.S. Treasury and federal agencies   $ 1,356         $ 7   $ 1,349   $ 1,345   $ 3         $ 1,348
Other investments     291               291     272               272
   
 
 
 
 
 
 
 
Total   $ 1,647         $ 7   $ 1,640   $ 1,617   $ 3         $ 1,620
   
 
 
 
 
 
 
 

9


Gross gains and losses realized on the sale of available-for-sale securities were as follows for the periods indicated:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

(Dollars in millions)

  2004
  2003
  2004
  2003
Gross gains   $ 3   $ 10   $ 42   $ 44
Gross losses     3     15     23     15
   
 
 
 
Net gain   $   $ (5 ) $ 19   $ 29
   
 
 
 

Note 4—Allowance for Loan Losses

State Street establishes an allowance for loan losses to absorb probable credit losses. Changes in the allowance for loan losses were as follows:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

(Dollars in millions)

  2004
  2003
  2004
  2003
Balance at beginning of period   $ 36   $ 61   $ 61   $ 61
Reclassification             (25 )  
   
 
 
 
Balance at end of period   $ 36   $ 61   $ 36   $ 61
   
 
 
 

During the first quarter of 2004, State Street reclassified $25 million of the allowance for loan losses to other liabilities as a reserve for off-balance sheet commitments. Subsequent to the reclassification, the reserve for off-balance sheet commitments was reduced by $10 million, and recorded as an offset to other operating expenses.

Note 5—Other Assets and Other Liabilities

 Other assets included $1.88 billion and $3.82 billion of unrealized gains on foreign exchange contracts at September 30, 2004, and December 31, 2003, respectively.

Other liabilities included $1.77 billion and $3.61 billion of unrealized losses on foreign exchange contracts at September 30, 2004, and December 31, 2003, respectively.

Note 6—Stockholders' Equity

SPACES

In January 2003, in connection with its acquisition of the GSS business (see Note 2), State Street issued $345 million, or 1.7 million units, of SPACESsm. SPACES are collateralized, forward purchase contract units for additional shares of common stock of State Street. Each of the SPACES has a stated amount of $200 and consists of PACESsm, a fixed-share purchase contract and treasury securities, and COVERSsm, a variable-share repurchase contract. The SPACES investors will receive total annual payments of 6.75% on the units, payable quarterly, consisting of an annual 4.00% contract payment on the COVERS, an annual 0.75% contract payment on the PACES and a 2.00% annual return on the underlying treasury securities. The present value of the contract payments totaled $45 million, and was treated as a cost of capital and

10



charged to surplus upon issuance. State Street will receive the proceeds of $345 million and issue common stock upon settlement of the fixed-share purchase contracts underlying the SPACES units on November 15, 2005.

Effective March 22, 2004, State Street exercised its right to fix the variable-share settlement rate of the variable-share repurchase contracts constituting part of the SPACES or existing separately as Separate COVERS, in accordance with the terms of the contracts. The variable-share settlement rate is fixed at 0.6949 shares per contract in accordance with a formula specified in the contracts.

After the effective date, a holder of a variable-share repurchase contract (whether held as a component of a SPACES or as a Separate COVERS) may settle the variable-share repurchase contract by delivery to the Purchase Contract Agent of that number of shares of common stock of State Street equal to the variable-share settlement rate, as fixed.

The impact of fixing the settlement rate for the SPACES and Separate COVERS was a reclassification of the recognized gains of $26 million associated with the mark-to-market of the variable-share contracts from other assets to a reduction of surplus in stockholders' equity.

Accumulated Other Comprehensive (Loss) Income

The components of accumulated other comprehensive (loss) income, net of related taxes, were as follows:

(Dollars in millions)

  September 30,
2004

  December 31,
2003

 
Unrealized (loss) gain on available-for-sale securities   $ (11 ) $ 74  
Minimum pension liability     (23 )    
Foreign currency translation     131     128  
Unrealized loss on cash flow hedges     (11 )   (10 )
   
 
 
Total   $ 86   $ 192  
   
 
 

Total comprehensive income for the three and nine months ended September 30, 2004, was $268 million and $508 million, respectively, and for the three and nine months ended September 30, 2003, was $182 million and $295 million, respectively.

11



Note 7—Regulatory Capital

 The regulatory capital amounts and ratios were as follows as of September 30, 2004, and December 31, 2003:

 
  Regulatory Guidelines(1)
  State Street
  State Street Bank
 
(Dollars in millions)

  Minimum
  Well
Capitalized

  2004
  2003
  2004
  2003
 
Tier 1 risk-based capital ratio   4 % 6 %   13.3 %   14.0 %   11.5 %   12.4 %
Total risk-based capital ratio   8   10     14.8     15.8     12.5     13.7  
Tier 1 leverage ratio   3   5     5.6     5.6     5.3     5.4  
Tier 1 capital           $ 5,240   $ 4,822   $ 4,409   $ 4,185  
Total capital             5,823     5,450     4,788     4,601  
Adjusted risk-weighted assets and market-risk equivalents:                                  
On-balance sheet           $ 24,736   $ 19,681   $ 23,676   $ 18,814  
Off-balance sheet             14,300     14,385     14,305     14,391  
Market-risk equivalents             298     436     195     421  
           
 
 
 
 
Total           $ 39,334   $ 34,502   $ 38,176   $ 33,626  
           
 
 
 
 
Quarterly average adjusted assets           $ 93,957   $ 85,562   $ 82,782   $ 76,888  

(1)
State Street Bank must meet the regulatory designation of "well capitalized" in order to maintain State Street's status as a financial holding company, including maintaining a minimum Tier 1 risk-based capital ratio (Tier 1 capital divided by adjusted risk-weighted assets and market-risk equivalents) of 6%, a minimum total risk-based capital ratio (total capital divided by adjusted risk-weighted assets and market-risk equivalents) of 10%, and a Tier 1 leverage ratio (Tier 1 capital divided by quarterly average adjusted assets) of 5%. 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 Regulation Y 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%.

12


Note 8—Net Interest Revenue

 Net interest revenue consisted of the following:

 
  Three Months Ended
September 30,

  Nine Months Ended September 30,
(Dollars in millions)

  2004
  2003
  2004
  2003
Interest Revenue:                    
Deposits with banks   $ 161   $ 114   $425   $362

Investment securities:

 

 

 

 

 

 

 

 

 

 
U.S. Treasury and federal agencies     137     99   374   295
State and political subdivisions (exempt from federal tax)     14     15   42   48
Other investments     66     64   196   195

Securities purchased under resale agreements and federal funds sold

 

 

51

 

 

32

 

128

 

136
Commercial and financial loans     13     15   41   44
Lease financing     18     21   39   67
Trading account assets     3     4   10   15
   
 
 
 
Total interest revenue     463     364   1,255   1,162

Interest Expense:

 

 

 

 

 

 

 

 

 

 
Deposits     134     81   339   289
Other borrowings     90     58   202   217
Long-term debt     26     22   72   56
   
 
 
 
Total interest expense     250     161   613   562
   
 
 
 
Net interest revenue   $ 213   $ 203   $642   $600
   
 
 
 

13


Note 9—Employee Benefit Plans

 The components of net periodic benefit cost were as follows:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
  Pension Benefits
  Other Benefits
  Pension Benefits
  Other Benefits
(Dollars in millions)

  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
Service cost   $ 11   $ 11   $ 1   $ 1   $ 33   $ 33   $ 3   $ 3
Interest cost     9     9     1     1     27     27     3     3
Expected return on plan assets     (10 )   (9 )           (30 )   (27 )      
Transition (asset)/obligation                         (2 )      
Amortization of prior service cost     (1 )   1             (3 )   1        
Amortization of net loss     5     3             15     11        
Curtailment(1)                         5         7
Special termination benefit(1)                         74         6
Settlement     1                 1            
   
 
 
 
 
 
 
 
Net periodic benefit cost   $ 15   $ 15   $ 2   $ 2   $ 43   $ 122   $ 6   $ 19
   
 
 
 
 
 
 
 

(1)
Curtailment and special termination benefits were accrued as part of the Corporation's restructuring program. See Note 10 for further details.

Employer Contributions

Expected employer contributions to the tax-qualified U.S. defined benefit pension plans, non-qualified supplemental employee retirement plans ("SERPs") and post-retirement plan for the year ending December 31, 2004 are $55 million, $18 million and $3 million, respectively.

14


Note 10—Restructuring Costs

 During the second quarter of 2003, State Street implemented an expense reduction program to decrease operating expenses. The expense reductions were achieved through a decrease in direct controllable expenses and by a voluntary separation and enhanced severance program ("VSP"), primarily in the United States. At June 30, 2003, approximately 3,000 individuals accepted the VSP. Subsequent to the VSP, approximately 1,000 positions were replaced. State Street incurred $3 million and $295 million of restructuring costs for the three and nine months ended September 30, 2003, as a result of the program, as follows:

(Dollars in millions)

  Restructuring
Costs

Costs by Category:      
Severance   $ 157
Pension     80
Stock compensation     36
Other     22
   
Total   $ 295
   
Costs by Line of Business      
Investment Servicing   $ 261
Investment Management     34
   
Total   $ 295
   

No VSP-related expenses were incurred during the nine months ended September 30, 2004. Following is a rollforward of the restructuring accrual for the nine months ended September 30, 2004:

(Dollars in millions)

  Restructuring
Accrual

 
Balance as of December 31, 2003   $ 176  
Cash payments made to date     (70 )
Reclassifications(1)     (103 )
   
 
Balance as of September 30, 2004   $ 3  
   
 

(1)
Reclassifications included amounts transferred to pension, retirement medical benefits and deferred stock compensation liabilities.

The restructuring costs were recorded at the time the accounting events and measurement date occurred. Severance costs included salaries and related benefits to be paid out over a defined period of up to two years. Pension costs will be paid out primarily in equal annual installments over a five-year period. Stock compensation expense was attributable to the modification of various stock options and restricted and deferred stock awards for individuals who accepted the VSP (see the Stock-Based Compensation disclosures in Note 1). Other restructuring costs include outplacement services associated with the termination of employees and professional and actuarial fees incurred.

15


Note 11—Operating Expenses—Other

 The other category of operating expenses consisted of the following:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

(Dollars in millions)

  2004
  2003
  2004
  2003
Professional services   $ 46   $ 24   $ 119   $ 67
Advertising and sales promotion     10     9     34     30
Other     50     48     166     155
   
 
 
 
Total operating expenses—other   $ 106   $ 81   $ 319   $ 252
   
 
 
 

Note 12—Income Taxes

 State Street recorded tax expense of $91 million for the third quarter of 2004, compared to $103 million in the third quarter of 2003. Tax expense for the nine months ended September 30, 2004 and 2003, was $299 million and $159 million, respectively.

Tax expense for the nine months ended September 30, 2004, included a cumulative benefit of $18 million recorded in the first quarter of 2004 resulting from a change in the effective state tax rate applied to leveraged leasing transactions.

Tax expense for the nine months ended September 30, 2003 included an after-tax charge of $12 million for the settlement of a tax matter with the Massachusetts Department of Revenue.

The effective tax rate for the third quarter of 2004 was 34% and for the nine months ended September 30, 2004, was 32.8%, including the impact of the leveraged lease tax benefit. The expected tax rate for the full year 2004 is 33.0%, compared with an effective tax rate of 35.1% for full year 2003.

Note 13—Lines of Business

 State Street has two primary lines of business—Investment Servicing and Investment Management.

Investment Servicing provides services for U.S. mutual funds, collective funds worldwide, corporate and public retirement plans, insurance companies, foundations, endowments, and other investment pools. Products include custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; recordkeeping; foreign exchange and trading services; securities lending; deposit and short-term investment facilities; loans and lease financing; investment operations outsourcing; wealth manager and hedge fund manager services; and performance, risk and compliance analytics to support institutional investors. State Street has a 50% interest in Boston Financial Data Services, Inc. and the International Financial Data Services group of companies, which provide shareholder services, including mutual fund and collective fund shareholder accounting. Revenue from Investment Servicing comprised 85% of State Street's total revenue for the nine months ended September 30, 2004.

Investment Management offers a broad array of services for managing financial assets, including investment management and investment research, primarily for institutional investors worldwide. These services included passive and active U.S. and non-U.S. equity and fixed income strategies, and other related services, such as securities lending. Retirement benefit services are provided through CitiStreet, LLC, in which State Street has a 50% interest. Revenue from the Investment Management line of business comprised 15% of State Street's total revenue for the nine months ended September 30, 2004.

16



Business Divesture consisted of revenue and expenses related to the Private Asset Management operations sold in October 2003.

Other/One-Time charges for 2004 consisted of merger and integration costs related to the acquisition of GSS; Other/One-Time charges for 2003 consisted of restructuring, merger and integration costs included in operating expenses and for the nine months ended September 30, 2003, included the loss on the sale of certain real estate included in processing fees and other revenue.

The total columns represent consolidated results in accordance with accounting principles generally accepted in the United States as they appear in the Consolidated Statements of Income.

 
   
   
  For the Three Months Ended September 30,
   
   
 
 
  Investment
Servicing

  Investment
Management

  Business
Divestiture

  Other/
One-Time

   
   
 
 
  Total
 
(Dollars in millions,
except where otherwise noted)

 
  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
 
Fee Revenue:                                                            
Servicing fees   $ 568   $ 505                                     $ 568   $ 505  
Management fees           $ 156   $ 122       $ 19                 156     141  
Securities lending     39     51     9     10                         48     61  
Foreign exchange trading     75     101                                 75     101  
Brokerage fees     31     28                                 31     28  
Processing fees and other     71     83     12     9                         83     92  
   
 
 
 
 
 
 
 
 
 
 
Total fee revenue     784     768     177     141         19                 961     928  
Net interest revenue after provision for loan losses     202     195     11     8                         213     203  
Gains on the sales of available-for-sale investment securities, net         (5 )                                   (5 )
   
 
 
 
 
 
 
 
 
 
 
Total Revenue     986     958     188     149         19                 1,174     1,126  
Operating Expenses     754     666     136     115         11   $ 16   $ 29     906     821  
   
 
 
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes   $ 232   $ 292   $ 52   $ 34       $ 8   $ (16 ) $ (29 ) $ 268   $ 305  
   
 
 
 
 
 
 
 
 
 
 
Pre-tax margin     24 %   31 %   28 %   23 %                                  
Average assets (in billions)   $ 93.0   $ 79.6   $ 2.8   $ 2.1       $ .1               $ 95.8   $ 81.8  

17


 
   
   
  For the Nine Months Ended September 30,
   
   
 
  Investment
Servicing

  Investment
Management

  Business
Divestiture

  Other/
One-Time

   
   
 
  Total
(Dollars in millions,
except where otherwise noted)

  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
Fee Revenue:                                                          
Servicing fees   $ 1,693   $ 1,425                                     $ 1,693   $ 1,425
Management fees           $ 456   $ 341       $ 55                 456     396
Securities lending     163     162     38     30                         201     192
Foreign exchange trading     309     276                                 309     276
Brokerage fees     112     85                                 112     85
Processing fees and other     206     215     42     22         1         $ (13 )   248     225
   
 
 
 
 
 
 
 
 
 
Total fee revenue     2,483     2,163     536     393         56           (13 )   3,019     2,599
Net interest revenue after provision for loan losses     612     572     30     28                       642     600
Gains on the sales of available-for-sale investment securities, net     19     29                               19     29
   
 
 
 
 
 
 
 
 
 
Total Revenue     3,114     2,764     566     421         56           (13 )   3,680     3,228
Operating Expenses     2,294     2,032     423     352         34   $ 50     376     2,767     2,794
   
 
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes   $ 820   $ 732   $ 143   $ 69       $ 22   $ (50 ) $ (389 ) $ 913   $ 434
   
 
 
 
 
 
 
 
 
 
Pre-tax margin     26 %   26 %   25 %   16 %                                
Average assets (in billions)   $ 92.0   $ 79.0   $ 2.6   $ 1.9       $ .1               $ 94.6   $ 81.0

Note 14—Earnings Per Share

 The following table sets forth the computation of basic and diluted earnings per share:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

(Dollars in millions, except per share data; shares in thousands)

  2004
  2003
  2004
  2003
Net income   $ 177   $ 202   $ 614   $ 275
Earnings per share:                        
Basic   $ .52   $ .61   $ 1.83   $ .83
Diluted     .52     .60     1.80     .82
Basic average shares     335,626     332,246     335,065     331,056
Effect of dilutive securities:                        
Stock options and stock awards     2,635     4,184     3,655     2,961
Equity-related financial instruments     1,087     138     1,809     143
   
 
 
 
Dilutive average shares     339,348     336,568     340,529     334,160
   
 
 
 

As of September 30, 2004 and 2003, 14.2 million and 11.9 million of potentially-dilutive stock options were outstanding, but not included in the computation of diluted average shares because the exercise prices of the instruments were greater than the average fair value of State Street's common stock.

18


Note 15—Contingent Liabilities

 State Street provides custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; investment management; recordkeeping; foreign exchange and trading services; securities lending; deposit and short-term investment facilities; loans and lease financing; investment operations outsourcing; wealth manager and hedge fund manager services; and performance, risk and compliance analytics to clients worldwide. Assets under custody and assets under management are held by State Street in a fiduciary or custodial capacity 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, no contingent liabilities existed at September 30, 2004, that would have a material adverse effect on State Street's financial position or results of operations.

In the normal course of business, State Street is subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due. These challenges may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions.

The Internal Revenue Service ("IRS") completed its review of State Street's federal income tax returns for 1997, 1998 and 1999 in the third quarter and has issued Notices of Proposed Adjustment with respect to the tax treatment of lease-in-lease-out transactions. The proposed adjustments relate to the timing of recognition of income for tax purposes; for financial reporting purposes, deferred taxes have been provided. State Street believes that it properly reported the tax effects of these transactions based on applicable statutes, regulations and case law in effect at the time they were entered into; a court or other judicial or administrative authority could disagree. The IRS has indicated that it may consider settling such disputes with taxpayers. State Street has begun settlement discussions.

While it is unclear whether State Street will be able to reach an acceptable settlement, management believes the Corporation is appropriately accrued for tax exposures and related interest expense, including for lease-in-lease-out transactions. The Corporation understands that FASB may currently be reviewing the GAAP treatment of negotiated settlements of tax disputes involving leases accounted for under SFAS 13. It is possible that FASB's review could affect the accounting recognition of any potential settlement with IRS, and could result in a charge to earnings. If State Street prevails in a matter for which an accrual has been established, or is required to pay an amount exceeding its reserve, the financial impact will be reflected in the period that the matter is resolved.

19



Note 16—Derivative Financial Instruments

 State Street uses various derivatives to support clients' needs, conduct trading activities and manage its interest rate and currency risk. The following table summarizes the contractual or notional amounts of derivative financial instruments held or issued for trading and balance sheet management:

(Dollars in millions)

  September 30,
2004

  December 31,
2003

Trading:            
Interest rate contracts:            
Swap agreements   $ 2,035   $ 3,154
Options and caps purchased     320     332
Options and caps written     1,435     656
Futures     39,418     40,003
Foreign exchange contracts:            
Forward, swap and spot     331,742     322,051
Options purchased     3,670     2,243
Options written     3,112     2,064
Futures     200     ?
Balance Sheet Management:            
Interest rate contracts:            
Swap agreements     3,191     3,964
Foreign exchange contracts:            
Forward, swap and spot     373     ?

In connection with its interest-rate risk management strategies, State Street has executed interest-rate swap agreements with a notional value of $1.84 billion as of September 30, 2004, designated as fair value hedges to hedge the changes in the fair value of certain securities. For the three and nine months ended September 30, 2004, State Street recognized net pre-tax gains of $1 million and $3 million, respectively, which represented the ineffective portion of the hedge.

State Street has designated interest-rate swaps with a notional value of $150 million as cash flow hedges to its floating-rate debt. These interest-rate swaps qualify as fully effective hedges. In addition, $1.20 billion was designated as fair value hedges to hedge certain of its fixed-rate debt. The fair value hedge swaps increased the value of long-term debt presented in the Statement of Condition by $76 million at September 30, 2004. For the three and nine months ended September 30, 2004, the Corporation's overall weighted average interest rate for long-term debt was 6.1% and 6.2% on a contractual basis and 4.3% and 4.2% including the effects of derivative contracts, respectively.

During the third quarter of 2004, State Street entered into forward foreign currency swaps with a basis of €300 million, or approximately $373 million, to hedge the Corporation's net foreign investment in certain non-U.S. subsidiaries. As a result, less than $1 million of translation gains for certain non-U.S. subsidiaries were offset by a loss on the hedge contract within the category foreign currency translation, recorded as a component of accumulated other comprehensive income in stockholders' equity.

20



Note 17—Commitments and Off-Balance Sheet Activities

 The following is a summary of the contractual amount of State Street's credit-related, off-balance sheet financial instruments:

(Dollars in millions)

  September 30,
2004

  December 31,
2003

Securities lending indemnifications   $ 316,166   $ 266,055
Liquidity asset purchase agreements     19,183     16,540
Loan commitments     12,320     12,270
Standby letters of credit     4,784     4,545

On behalf of its clients, State Street lends their securities to creditworthy brokers and other institutions. In certain circumstances, State Street may indemnify its clients for the fair market value of those securities against a failure of the borrower to return such securities. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 102% of the fair market value of the securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. State Street held, as collateral, cash and U.S. government securities totaling $326.46 billion and $271.30 billion for indemnified securities on loan at September 30, 2004 and December 31, 2003, respectively.

Loan commitments (unfunded loans and unused lines of credit), liquidity asset purchase agreements and standby letters of credit are issued to accommodate the financing needs of State Street's clients and to provide liquidity and credit enhancements to variable interest entities. Loan commitments are agreements by State Street to lend monies at a future date. Liquidity asset purchase agreements are commitments to purchase receivables or securities, subject to conditions established in the agreements.

Approximately 86% of the loan commitments and liquidity asset purchase agreements will expire within one year from the date of issue. Since many of the commitments are expected to expire or renew without being drawn, the total commitment amounts do not necessarily represent future cash requirements.

State Street provides liquidity and credit enhancement facilities in the form of liquidity asset purchase agreements, lines of credit, and standby letters of credit to two types of off-balance sheet entities. One type, structured as special purpose entities ("SPEs"), as defined by FIN 46 (revised), which are administered by State Street, issues asset-backed commercial paper ("ABCP"). At September 30, 2004 and December 31, 2003, State Street's commitments under liquidity asset purchase agreements and lines of credit to these SPEs were $13.89 billion and $11.88 billion, respectively, and standby letters of credit were $646 million and $644 million, respectively. Amounts committed, but unused, under the liquidity asset purchase agreements, lines of credit and standby letters of credit that State Street provides to these SPEs are included in the preceding table. Asset performance deterioration or certain other factors may cause the asset risk to shift from the ABCP investors to State Street as the liquidity and/or credit enhancement provider through the liquidity asset purchase agreements, lines of credit and standby letters of credit, as the SPE may need to repay maturing commercial paper by drawing the liquidity facilities. State Street would acquire the assets at fair market value at the date of transfer. Potential losses, if any, from these SPEs are not expected to materially affect the financial condition or results of operations of the Corporation.

For a second type of off-balance sheet entity, structured as qualified special-purpose entities ("QSPEs") in accordance with accounting principles generally accepted in the United States, State Street distributes and sells equity interests in tax-exempt investment-grade assets that are primarily sold to mutual fund clients. For these QSPEs, State Street transfers the assets from its investment portfolio at fair market value. Such

21



transfers are treated as sales. The QSPEs finance the acquisition of these assets by selling equity interests to third-party investors. State Street owns a minority residual interest in these QSPEs of less than 7.1%, or $138 million at September 30, 2004. These trusts have a weighted average life of approximately 5.2 years. In a separate agreement, State Street provides liquidity asset purchase agreements to these entities. These liquidity asset purchase agreements obligate State Street to buy the equity interests in the underlying portfolio at par, which approximates market value, in the event that the re-marketing agent is unable to place the equity interests of the off-balance sheet entity with investors. The liquidity asset purchase agreements are subject to early termination by State Street in the event of payment default, bankruptcy of the issuer or credit enhancement provider, taxability, or downgrade of an asset below investment grade. State Street's liquidity asset purchase agreements to these off-balance sheet entities were $1.47 billion at September 30, 2004, and $1.24 billion at December 31, 2003, none of which were utilized and are included in the preceding table.

For the nine months ended September 30, 2004, State Street acquired and transferred approximately $387 million of investment securities out of its available-for-sale portfolio at fair market value in exchange for cash to another off-balance sheet entity structured as a QSPE. These transfers were accounted for as sales. State Street provides investment management services to this unaffiliated QSPE.

22


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Stockholders and Board of Directors
State Street Corporation

We have reviewed the condensed consolidated statement of condition of State Street Corporation as of September 30, 2004, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2004 and 2003, and the condensed consolidated statements of changes in stockholders' equity and cash flows for the nine-month periods ended September 30, 2004 and 2003. These financial statements are the responsibility of the Corporation's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of condition of State Street Corporation as of December 31, 2003, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended not presented herein, and in our report dated January 12, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of condition as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.

  ERNST & YOUNG LLP
Boston, Massachusetts
October 11, 2004
 

23



ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

State Street prepares and reports its financial information in accordance with accounting principles generally accepted in the United States ("reported" results). Unless otherwise indicated, results discussed in this Form 10-Q refer to reported results.

Results for the Three Months Ended September 30, 2004 and 2003

Condensed Income Statement—Reported Results

 
  Three Months Ended September 30,
 
(Dollars in millions, except per share data)

  2004
  2003
  $ Change
  % Change
 
Fee Revenue:                        
Servicing fees   $ 568   $ 505   $ 63   12 %
Management fees     156     141     15   11  
Securities lending     48     61     (13 ) (21 )
Foreign exchange trading     75     101     (26 ) (26 )
Brokerage fees     31     28     3   11  
Processing fees and other     83     92     (9 ) (10 )
   
 
 
     
Total fee revenue     961     928     33   4  
Net Interest Revenue:                        
Net interest revenue     213     203     10      
Provision for loan losses                  
   
 
 
     
Net interest revenue after provision for loan losses     213     203     10   5  
Gains on the sales of available-for-sale investment securities, net         (5 )   5   (100 )
   
 
 
     
Total Revenue     1,174     1,126     48   4  
Operating Expenses:                        
Salaries and employee benefits     474     407     67   16  
Information systems and communications     127     140     (13 ) (9 )
Transaction processing services     95     80     15   19  
Occupancy     88     84     4   5  
Merger and integration costs     16     26     (10 ) (38 )
Restructuring costs         3     (3 ) (100 )
Other     106     81     25   31  
   
 
 
     
Total operating expenses     906     821     85   10  
   
 
 
     
Income before income taxes     268     305     (37 ) (12 )
Income tax expense     91     103     (12 )    
   
 
 
     
Net Income   $ 177   $ 202   $ (25 ) (12 )
   
 
 
     
Earnings Per Share:                        
Basic   $ .52   $ .61   $ (.09 ) (15 )
Diluted     .52     .60     (.08 ) (13 )

24


Supplemental Financial Information

In order to provide information on a comparable basis from period to period and to assist stockholders, analysts, other external parties and management in analyzing the financial results and trends of its ongoing businesses and operations, supplemental financial results on an "operating" basis are presented below. In this Management's Discussion and Analysis of Financial Condition and Results of Operations section, the discussion will reference reported results, as previously defined, and "operating" results. Operating results are defined as reported results on a taxable equivalent basis, excluding merger and integration costs and for 2003, restructuring costs, the loss on the sale of certain real estate, the results of the divested Private Asset Management ("PAM") business and the impact of a state tax matter.

Supplemental Financial Information—Operating Basis Reconciliation

 
  Three Months Ended September 30,
 
 
  2004
  2003
 
(Dollars in millions, except per share data)

  Operating
Results

  Other
  Reported
Results

  Operating
Results

  PAM(4)
  Other
  Reported
Results

 
Fee Revenue:                                            
Servicing fees   $ 568         $ 568   $ 505               $ 505  
Management fees     156           156     122   $ 19           141  
Securities lending     48           48     61               61  
Foreign exchange trading     75           75     101               101  
Brokerage fees     31           31     28               28  
Processing fees and other     83           83     92               92  
   
       
 
 
       
 
Total fee revenue     961           961     909     19           928  
Net Interest Revenue:                                            
Net interest revenue     223   $ (10 )(1)   213     216       $ (13 )(1)   203  
Provision for loan losses                              
   
 
 
 
 
 
 
 
Net interest revenue after provision for loan losses     223     (10 )   213     216         (13 )   203  
Gains on the sales of available-for-sale investment securities,net                 (5 )           (5 )
   
 
 
 
 
 
 
 
Total Revenue     1,184     (10 )   1,174     1,120     19     (13 )   1,126  
Operating Expenses:                                            
Salaries and employee benefits     474         474     402     5         407  
Information systems and communications     127         127     140             140  
Transaction processing services     95         95     79     1         80  
Occupancy     88         88     83     1         84  
Merger and integration costs         16 (2)   16             26 (2)   26  
Restructuring costs                         3     3  
Other     106         106     77     4         81  
   
 
 
 
 
 
 
 
Total operating expenses     890     16     906     781     11     29     821  
   
 
 
 
 
 
 
 
Income (loss) before income taxes     294     (26 )   268     339     8     (42 )   305  
Income tax expense (benefit)     96     (5 )(3)   91     107     2     (6 )(3)   103  
Taxable-equivalent adjustment     10     (10 )(1)       13         (13 )(1)    
   
 
 
 
 
 
 
 
Net Income (Loss)   $ 188   $ (11 ) $ 177   $ 219   $ 6   $ (23 ) $ 202  
   
 
 
 
 
 
 
 
Earnings (Loss) Per Share—Diluted   $ .55   $ (.03 ) $ .52   $ .65   $ .01   $ (.06 ) $ .60  

Reported results agree with the Corporation's Consolidated Statement of Income

(1)
Taxable-equivalent adjustment not included in reported results

(2)
Merger and integration costs associated with the acquisition of the GSS business on January 31, 2003

(3)
Tax benefit associated with the merger and integration costs

(4)
Revenue and expenses of the Private Asset Management business divested October 31, 2003

25


Supplemental Financial Information—Reconciliation of Reported Results to Non-GAAP Measures

(Dollars in millions, except per share data)

  Total
Revenue

  Total
Operating
Expenses

  Income
Before
Income
Taxes

  Income Tax
Expense

  Net
Income

  Earnings
Per Share

 
Three months ended September 30, 2004                                      
Reported results—GAAP   $ 1,174   $ 906   $ 268   $ 91   $ 177   $ .52  
Non-operating business activities:                                      
Merger and integration costs         (16 )   16     5     11     .03  
   
 
 
 
 
 
 
Total non-operating business activities         (16 )   16     5     11     .03  
Taxable-equivalent adjustment     10         10     10          
   
 
 
 
 
 
 
Operating results   $ 1,184   $ 890   $ 294   $ 106   $ 188   $ .55  
   
 
 
 
 
 
 
Three months ended September 30, 2003                                      
Reported results—GAAP   $ 1,126   $ 821   $ 305   $ 103   $ 202   $ .60  
Results of the divested Private Asset Management business     (19 )   (11 )   (8 )   (2 )   (6 )   (.01 )
Non-operating business activities:                                      
Merger and integration costs         (26 )   26     5     21     .05  
Restructuring costs         (3 )   3     1     2     .01  
   
 
 
 
 
 
 
Total non-operating business activities         (29 )   29     6     23     .06  
Taxable-equivalent adjustment     13         13     13          
   
 
 
 
 
 
 
Operating results   $ 1,120   $ 781   $ 339   $ 120   $ 219   $ .65  
   
 
 
 
 
 
 

26


Supplement Financial Information—Operating(1)—Consolidated Statement of Income

 
  Three Months Ended September 30,
 
(Dollars in millions, except per share data)

  2004
  2003
  $ Change
  % Change
 
Operating Fee Revenue:                        
Servicing fees   $ 568   $ 505   $ 63   12 %
Management fees     156     122     34   28  
Securities lending     48     61     (13 ) (21 )
Foreign exchange trading     75     101     (26 ) (26 )
Brokerage fees     31     28     3   11  
Processing fees and other     83     92     (9 ) (10 )
   
 
 
     
Total operating fee revenue     961     909     52   6  
Operating Net Interest Revenue:                        
Net interest revenue     223     216     7      
Provision for loan losses                  
   
 
 
     
Net interest revenue after provision for loan losses     223     216     7   3  

Gains on the sales of available-for-sale investment securities,net

 

 


 

 

(5

)

 

5

 

(100

)
   
 
 
     
Total Operating Revenue     1,184     1,120     64   6  

Operating-Basis Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 
Salaries and employee benefits     474     402     72   18  
Information systems and communications     127     140     (13 ) (9 )
Transaction processing services     95     79     16   20  
Occupancy     88     83     5   6  
Other     106     77     29   38  
   
 
 
     
Total operating-basis operating expenses     890     781     109   14  
   
 
 
     
Income before income taxes     294     339     (45 ) (13 )
Income tax expense     96     107     (11 )    
Taxable-equivalent adjustment     10     13     (3 )    
   
 
 
     
Net Operating Income   $ 188   $ 219   $ (31 ) (14 )
   
 
 
     
Operating Diluted Earnings Per Share   $ .55   $ .65   $ (.10 ) (15 )

(1)
As defined and reconciled to reported results on an earlier schedule.

Summary

State Street reported net income for the third quarter of 2004 of $.52 per share, reflecting net income of $177 million and total revenue of $1.17 billion. These results compare to earnings per share of $.60, reflecting net income of $202 million and total revenue of $1.13 billion in the third quarter of 2003. Total expenses in the third quarter of 2004 were $906 million compared to $821 million in the year-ago quarter.

Results for the third quarter of 2004 included pre-tax merger and integration costs of $16 million, or $.03 per diluted share, due to the continuing integration of the Deutsche Bank Global Securities Services business (GSS), acquired in January of 2003, compared with $26 million, or $.05 per diluted share, for the year earlier period. Results for the third quarter of 2003 also included pre-tax restructuring costs of $3 million, or $.01 per diluted share. Third-quarter 2003 reported results also included the results of the divested PAM business, which was sold on October 31, 2003.

27



On an operating basis, which excludes merger and integration costs and for 2003, excludes restructuring costs and the results of the divested PAM business, operating earnings per share for the third quarter of 2004 were $.55, down 15% compared to operating earnings per share of $.65 for the third quarter of 2003. Operating earnings per share for 2003 have been reduced from the previously reported $.66 per share to exclude the results of the divested PAM business from the prior period.

Operating revenue of $1.18 billion in the third quarter of 2004 was up 6% from the third quarter of 2003, reflecting increased servicing fees largely offset by decreases in market-driven revenue, namely securities lending and foreign exchange trading revenue. Operating expenses of $890 million in the third quarter of 2004 were up $109 million, or 14%, from the third quarter of 2003. Return on stockholders' equity on an operating basis was 12.3% for the quarter.

State Street experienced declines in securities lending and foreign exchange trading revenue in the third quarter due to market activity. Related expenses were not lowered at a significant enough level to offset the decline in market-driven revenue.

State Street is taking steps to align its expenses with revenue, to better absorb shifts in market-driven revenue. In October 2004, the Corporation announced that it was limiting its near term investment in wealth management services and exiting the "529 education plan" servicing business. As a result of these decisions and others, State Street expects to eliminate about 425 positions, with annualized savings of approximately $50 million, with little impact on revenue. The Corporation expects to incur a charge of approximately $25 million in the fourth quarter of 2004 as a result.

State Street has announced revised financial goals for the Corporation. The revised goals are (1) annual growth in operating earnings per share of 10% to 15%, (2) annual operating revenue growth of 8% to 12%, and (3) annual operating return on stockholders' equity of 14% to 17%.

Near-term steps are being taken to better align expenses with revenue including the reorganization of significant operating groups, modification of the Corporation's incentive compensation plans and focus on balance sheet management. While State Street does not provide specific future earnings guidance, the Corporation expects 2005 operating results to fall in the lower end of the range for the operating revenue and earnings per share goals.

Total Revenue

In the third quarter of 2004, total reported revenue was $1.17 billion, up $48 million, compared to $1.13 billion a year ago, which included $19 million of management fees from the divested PAM business. On an operating basis, total revenue was $1.18 billion compared to $1.12 billion in 2003, an increase of $64 million, or 6%.

Fee Revenue

Fee revenue for the third quarter of 2004 was $961 million on both a reported and operating basis. Reported fee revenue for 2003 was $928 million and included $19 million of fee revenue from the divested PAM business. On an operating basis, fee revenue increased $52 million from $909 million in 2003. Combined, servicing and management fees were up 15% from the year ago quarter. Declines in market-driven revenue, defined by State Street as securities lending, foreign exchange trading and brokerage fee revenue, in large part, offset these increases.

Servicing fees are derived from custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; recordkeeping; investment operations outsourcing; wealth manager and hedge fund manager services and performance, risk and compliance analytics. Servicing fees for the third quarter of 2004 were $568 million, up $63 million, or 12%, from $505 million a year earlier. The increase was attributable to new business from existing and new clients and higher equity market valuations in 2004.

28



At September 30, 2004, total assets under custody were $9.00 trillion, up 3% from $8.75 trillion a year earlier. The value of assets under custody is a broad measure of the relative size of various markets served. Changes to the value of assets under custody do not result in proportional changes in revenue. Many services are priced on factors other than asset values, including the mix of assets under custody, securities positions held, portfolio transactions, and types of products and services. State Street uses relationship pricing for clients who take advantage of multiple services.

 
  September 30, 2004
  December 31, 2003
  September 30, 2003
 
Mix of Assets Under Custody
(Dollars in billions)

  Assets
  Percentage
of Total

  Assets
  Percentage
of Total

  Assets
  Percentage
of Total

 
Equities   $ 3,769   42 % $ 3,479   37 % $ 3,171   36 %
Fixed income     2,571   28     2,636   28     2,490   29  
Short-term investments     1,158   13     1,176   13     1,082   12  
Acquired GSS     1,502   17     2,079   22     2,009   23  
   
     
     
     
Total   $ 9,000       $ 9,370       $ 8,752      
   
     
     
     

Management fees from investment management services, generated by State Street Global Advisors®, were $156 million, compared to $141 million a year ago. Fees from the PAM business added $19 million to 2003 management fees. On an operating basis, management fees were up $34 million, or 28%, from $122 million in 2003, reflecting continued new business success and an increase in average month-end equity valuations. Total assets under management were $1.24 trillion, up 28%, compared to $965 billion the previous year.

Assets Under Management
(Dollars in billions)

   
September 30, 2003   $ 965
Net new business     70
Market appreciation     71
   
December 31, 2003     1,106
Net new business     104
Market appreciation     26
   
September 30, 2004   $ 1,236
   

Securities lending revenue was $48 million in the third quarter of 2004, compared to $61 million in the third quarter of the previous year, a decrease of 21%. The decrease reflected short-term pressure on spreads from the three rapid-succession increases in the target federal funds rate by the Federal Open Market Committee of the Federal Reserve ("FOMC") in June, August and September of this year, partially offset by a 22% increase in the volume of securities on loan.

Foreign exchange trading revenue was $75 million for the third quarter of 2004 compared to $101 million a year ago, a decline of 26%. The decline was attributable to lower currency volatility, lower cross-border investment activities of State Street's clients, and changes to the mix of business.

Brokerage fee revenue was $31 million in the third quarter, up 11% from $28 million in 2003 due to increased transition management for State Street's clients and higher equity trading volumes.

Processing fees and other revenue, which includes certain fees from Deutsche Bank related to the GSS business, profits and losses from joint ventures and other items, was $83 million in the quarter compared to $92 million a year ago.

29



Net Interest Revenue

Net interest revenue for the third quarter of 2004 was $213 million, up $10 million or 5% from the third quarter of 2003. On an operating, tax-equivalent basis, net interest revenue was $223 million, up $7 million, or 3%, from $216 million in the third quarter of 2003. An increase in the average balance sheet for the third quarter of 2004 offset the decrease in the interest rate spread that resulted from the rapid succession of increases in the target federal funds rate by the FOMC.

 
  Three Months Ended September 30,
 
 
  2004
  2003
 
(Dollars in millions)

  Average
Balance

  Rate(1)
  Average
Balance

  Rate(1)
 
Interest-earning assets   $ 84,420   2.23 % $ 73,064   2.04 %
Interest-bearing liabilities     77,138   1.29     62,700   1.02  
         
       
 
Excess of rate earned over rate paid         .94 %       1.02 %
         
       
 
Net interest margin         1.05 %       1.17 %

(1)
Rates were calculated on a taxable-equivalent basis where the tax savings generated by tax-exempt investments was recorded as net interest revenue with a corresponding charge to income tax expense. Tax savings were computed using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.

Net interest margin for the three months ended September 30, 2004 was 1.05%, a decrease of twelve basis points from the third quarter of 2003. Rates earned in excess of rates paid decreased by eight basis points year-over-year.

Gains on the Sales of Available-for-Sale Securities

State Street realized no net gain or loss on sales of available-for-sale securities in the third quarter of 2004, compared with a net loss of $5 million in the third quarter of the prior year.

Operating Expenses

Operating expenses for the third quarter of 2004 were $906 million, up from $821 million a year ago. Operating expenses for the third quarter of 2004 included $16 million of merger and integration expenses. Operating expenses for the third quarter of 2003 included merger and integration costs of $26 million, as well as a restructuring charge of $3 million related to a voluntary employee separation program and $11 million of expenses from the divested PAM business. Excluding merger and integration costs in both years and in 2003, restructuring costs and PAM, operating-basis operating expenses were $890 million, up $109 million, or 14%, from $781 million, largely driven by higher salaries and employee benefits, transaction processing services and other expenses.

Salaries and employee benefits expense was $474 million in the third quarter of 2004, compared with $407 million in 2003 on a reported basis, or $402 million, excluding expenses from the divested PAM business. The increase in salaries and employee benefits expense is primarily attributable to higher incentive compensation expense due to the Corporation's improved year-to-date earnings performance in 2004 of 20% in operating earnings per share. Also contributing to the increase were higher costs of benefits, merit increases and stock option expensing.

Information systems and communications expense for the third quarter of 2004 was $127 million, down $13 million from a year ago on both a reported and operating basis.

Transaction processing services expense increased $15 million on a reported basis, up $16 million on an operating basis, to $95 million, principally to support the increased volume in the investor services business.

30


Occupancy expense for the third quarter of 2004 was $88 million, up $4 million on a reported basis, or $5 million on an operating basis, from the third quarter of 2003, largely related to the space at State Street Financial Center, located in Boston, Massachusetts, which was not as fully occupied in the third quarter of 2003.

Merger and integration costs totaled $16 million for the quarter, down from $26 million a year earlier. These expenses consisted primarily of professional fees and systems integration costs incurred related to the GSS acquisition.

During the second quarter of 2003, State Street implemented an expense reduction program to decrease operating expenses. The expense reductions were achieved through a decrease in direct controllable expenses and by a voluntary separation and enhanced severance program ("VSP"), primarily in the United States. At June 30, 2003, approximately 3,000 individuals accepted the VSP. Subsequent to the VSP, approximately 1,000 positions were replaced. State Street incurred $3 million of restructuring costs for the three months ended September 30, 2003, as a result of the program. No amounts were incurred in the three months ended September 30, 2004.

Other operating expenses in the third quarter of 2004 were $106 million, compared with $81 million a year earlier on a reported basis and $77 million a year earlier on an operating basis. The increase is primarily due to professional service costs related to growth initiatives and compliance requirements, such as Sarbanes-Oxley readiness and Basel II.

Income Taxes

State Street recorded tax expense of $91 million for the third quarter of 2004, compared to expense of $103 million in the third quarter of 2003.

The effective rate for the third quarter of 2004 and 2003 was 34.0%. The expected tax rate for the full-year 2004 is 33.0%, including the impact of adjustments to state income taxes on leveraged lease transactions recorded in the first quarter of 2004. This rate compares with an effective full year tax rate of 35.1% in 2003, which included the settlement of a REIT-related tax matter.

31



Results for the Nine Months Ended September 30, 2004 and 2003

Condensed Income Statement—Reported Results

 
  Nine Months Ended September 30,
 
(Dollars in millions, except per share data)

  2004
  2003
  $ Change
  % Change
 
Fee Revenue:                        
Servicing fees   $ 1,693   $ 1,425   $ 268   19 %
Management fees     456     396     60   15  
Securities lending     201     192     9   5  
Foreign exchange trading     309     276     33   12  
Brokerage fees     112     85     27   32  
Processing fees and other     248     225     23   10  
   
 
 
     
Total fee revenue     3,019     2,599     420   16  

Net Interest Revenue:

 

 

 

 

 

 

 

 

 

 

 

 
Net interest revenue     642     600     42      
Provision for loan losses                  
   
 
 
     
Net interest revenue after provision for loan losses     642     600     42   7  

Gains on the sales of available-for-sale investment securities, net

 

 

19

 

 

29

 

 

(10

)

(34

)
   
 
 
     
Total Revenue     3,680     3,228     452   14  

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 
Salaries and employee benefits     1,446     1,294     152   12  
Information systems and communications     396     410     (14 ) (3 )
Transaction processing services     294     231     63   27  
Occupancy     262     231     31   13  
Merger and integration costs     50     81     (31 ) (38 )
Restructuring costs         295     (295 ) (100 )
Other     319     252     67   27  
   
 
 
     
Total operating expenses     2,767     2,794     (27 ) (1 )
   
 
 
     
Income before income taxes     913     434     479   110  
Income tax expense     299     159     140      
   
 
 
     
Net Income   $ 614   $ 275   $ 339   123  
   
 
 
     

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 
Basic   $ 1.83   $ .83   $ 1.00   120  
Diluted     1.80     .82     .98   120  

32


Supplemental Financial Information

Supplemental Financial Information—Operating Basis Reconciliation

 
  Nine Months Ended September 30,
 
  2004
  2003
(Dollars in millions,
except per share data)

  Operating
Results

  Other
  Reported
Results

  Operating
Results

  PAM(4)
  Other
  Reported
Results

Fee Revenue:                                          
Servicing fees   $ 1,693         $ 1,693   $ 1,425               $ 1,425
Management fees     456           456     341   $ 55           396
Securities lending     201           201     192               192
Foreign exchange trading     309           309     276               276
Brokerage fees     112           112     85               85
Processing fees and other     248           248     237     1   $ (13) (5)   225
   
       
 
 
 
 
Total fee revenue     3,019           3,019     2,556     56     (13 )   2,599
Net Interest Revenue:                                          
Net interest revenue     675   $ (33) (1)   642     639         (39) (1)   600
Provision for loan losses                            
   
 
 
 
 
 
 
Net interest revenue after provision for loan losses     675     (33 )   642     639         (39 )   600

Gains on the sales of available-for-sale investment securities, net

 

 

19

 

 


 

 

19

 

 

29

 

 


 

 


 

 

29
   
 
 
 
 
 
 
Total Revenue     3,713     (33 )   3,680     3,224     56     (52 )   3,228

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Salaries and employee benefits     1,446         1,446     1,276     18         1,294
Information systems and communications     396         396     409     1         410
Transaction processing services     294         294     230     1         231
Occupancy     262         262     227     4         231
Merger and integration costs         50 (6)   50             81(2)     81
Restructuring costs                         295     295
Other     319         319     242     10         252
   
 
 
 
 
 
 
Total operating expenses     2,717     50     2,767     2,384     34     376     2,794
   
 
 
 
 
 
 
Income (loss) before income taxes     996     (83 )   913     840     22     (428 )   434
Income tax expense (benefit)     316     (17) (3)   299     272     7     (120) (6)   159
Taxable-equivalent adjustment     33     (33) (1)       39         (39) (1)  
   
 
 
 
 
 
 
Net Income (Loss)   $ 647   $ (33 ) $ 614   $ 529   $ 15   $ (269 ) $ 275
   
 
 
 
 
 
 
Earnings (Loss) Per Share—Diluted   $ 1.90   $ (.10 ) $ 1.80   $ 1.58   $ .04   $ (.80 ) $ .82

Reported results agree with the Corporation's Consolidated Statement of Income

(1)
Taxable-equivalent adjustment not included in reported results

(2)
Merger and integration costs associated with the acquisition of the GSS business on January 31, 2003

(3)
Tax benefit associated with the merger and integration costs

(4)
Revenue and expenses of the Private Asset Management business divested October 31, 2003

(5)
Loss on the sale of certain real estate

(6)
Impact of a state tax matter ($12 million of expense) and the net tax benefit associated with the loss on the sale of certain real estate and merger, integration and restructuring costs

33


Supplement Financial Information—Operating(1)—Consolidated Statement of Income

 
  Nine Months Ended September 30,
 
(Dollars in millions, except per share data)

  2004
  2003
  $ Change
  % Change
 
Operating Fee Revenue:                        
Servicing fees   $ 1,693   $ 1,425   $ 268   19 %
Management fees     456     341     115   34  
Securities lending     201     192     9   5  
Foreign exchange trading     309     276     33   12  
Brokerage fees     112     85     27   32  
Processing fees and other     248     237     11   5  
   
 
 
     
Total operating fee revenue     3,019     2,556     463   18  

Operating Net Interest Revenue:

 

 

 

 

 

 

 

 

 

 

 

 
Net interest revenue     675     639     36      
Provision for loan losses                  
   
 
 
     
Net interest revenue after provision for loan losses     675     639     36   6  

Gains on the sales of available-for-sale investment securities, net

 

 

19

 

 

29

 

 

(10

)

(34

)
   
 
 
     
Total Operating Revenue     3,713     3,224     489   15  

Operating-Basis Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 
Salaries and employee benefits     1,446     1,276     170   13  
Information systems and communications     396     409     (13 ) (3 )
Transaction processing services     294     230     64   28  
Occupancy     262     227     35   15  
Other     319     242     77   32  
   
 
 
     
Total operating-basis operating expenses     2,717     2,384     333   14  
   
 
 
     
Income before income taxes     996     840     156   19  
Income tax expense     316     272     44      
Taxable-equivalent adjustment     33     39     (6 )    
   
 
 
     
Net Operating Income   $ 647   $ 529   $ 118   22  
   
 
 
     
Operating Diluted Earnings Per Share   $ 1.90   $ 1.58   $ .32   20  

(1)
As defined and reconciled to reported results on an earlier schedule.

Summary

State Street reported net income for the first nine months of 2004 of $1.80 per share, reflecting net income of $614 million and total revenue of $3.68 billion. In the first nine months of 2003, State Street earned $.82 per share, reflecting net income of $275 million and total revenue of $3.23 billion. Total expenses in the first nine months of 2004 of $2.77 billion are down $27 million compared to the year-ago period.

Results for the first nine months of 2004 included pre-tax merger and integration costs of $50 million, or $.10 per share due to the continuing integration of the GSS business, acquired in January of 2003. On an operating basis, State Street earned $1.90 per share, reflecting net income of $647 million on taxable equivalent revenue of $3.71 billion.

Results for the first nine months of 2003 included a pre-tax loss on the sale of certain real estate of $13 million, or $.02 per share, merger and integration costs of $81 million, or $.16 per share related to the GSS acquisition, restructuring costs of $295 million, or $.58 per share, and an after-tax charge of $12 million, or $0.04 per share related settlement of a tax matter with the Commonwealth of Massachusetts. Combined, these items decreased earnings per share by $.80. The first nine months of 2003 included the operating results of the divested PAM business which contributed $.04 per share. On an operating basis, net income for the first nine months of 2003 was $1.58 per share, reflecting net income of $529 million on taxable-equivalent revenue of $3.22 billion.

34


On an operating basis, earnings per share for the first nine months of 2004 were $1.90, up 20% compared to operating earnings per share of $1.58 for the first nine months of 2003. Favorable market conditions in the first half of the year more than offset the decline in the year-over-year performance of the third quarter. Operating revenue of $3.71 billion in the first nine months of 2004 was up 15% from the first nine months of 2003, primarily due to increases in servicing and management fees and foreign exchange trading revenue. Operating expenses of $2.72 billion in the first nine months of 2004 were up $333 million, or 14%, from the first nine months of 2003. Return on stockholders' equity on an operating basis was 14.5% for the first nine months of 2004.

Total Revenue

In the first nine months of 2004, total reported revenue was $3.68 billion, up $452 million, compared to $3.23 billion a year ago. Reported revenue for 2003 included $56 million of revenue attributable to the PAM business. On an operating basis, total taxable-equivalent revenue was $3.71 billion compared to $3.22 billion in 2003, an increase of $489 million, reflecting an increase of $463 million in fee revenue and $36 million of net interest revenue, offset somewhat by a $10 million decline in gains on sales of available-for-sale securities. Total revenue for 2004 included nine months of GSS results compared with only eight months in 2003. The GSS business was acquired on January 31, 2003.

Servicing fees for the first nine months of 2004 were $1.69 billion, up $268 million, or 19%, from servicing fees of $1.43 billion a year earlier. The increase was attributable to the full nine months of servicing fee revenue generated by the GSS business, higher equity market valuations and new business from existing and new clients in 2004.

Management fees from investment management services were $456 million, compared to $396 million a year ago. Fees from the PAM business added $55 million to 2003 management fees. On an operating basis, management fees were up $115 million, or 34%, from $341 million in 2003, reflecting continued new business success and an increase in average month-end equity valuations.

Securities lending revenue was $201 million in the first nine months of 2004, compared to $192 million in the first nine months of the previous year, an increase of 5%. Securities lending revenue in 2004 reflected a full nine months of fees from GSS and a 33% increase in the volume of securities lent, largely offset by a decrease in interest rate spreads in the third quarter of 2004 that were attributable to the rapid succession of increases in the target interest rate by the Federal Reserve.

Foreign exchange trading revenue was $309 million for the first nine months of 2004, up 12% from $276 million a year ago. The increase was attributable to significantly higher currency volatility, and higher volumes reflecting increased cross-border investment activities of State Street's clients in the first and second quarter of 2004. For the first six months of 2004, foreign exchange trading revenue was up 34%, but during the third quarter of 2004, market conditions, including lower volatility and lower volumes, caused foreign exchange trading revenue to decline 26% from the year earlier quarter.

Brokerage fee revenue was $112 million in the first nine months, up 32% from $85 million in 2003 due to an increase in transition management for State Street's clients and growth in electronic trade execution and equity trading volumes.

Processing fees and other revenue, which includes certain fees from Deutsche Bank related to the GSS business, profits and losses from joint ventures and other items, was $248 million in the first nine months of 2004 compared to $225 million a year ago, or $237 million on an operating basis, excluding the loss on the sale of certain real estate and revenue from the PAM business. The increase was primarily driven by improved performance by the Corporation's joint ventures.

Net interest revenue for the first nine months of 2004 was $642 million, up $42 million, or 7% from $600 million to the first nine months of 2003. On an operating, tax-equivalent basis, net interest revenue was $675 million, up $36 million, or 6%, from $639 million in the first nine months of 2003. The increase in

35



net interest revenue reflected an increase in the average balance sheet for the period and higher interest-rate spreads for the first six months of 2004. Somewhat offsetting these increases, net interest revenue for 2004 was reduced by a cumulative charge of $19 million recorded in the first quarter of 2004 that resulted from a change in effective state tax-rate assumptions used for recognition of income from leveraged lease transactions. Net interest revenue was impacted by lower interest rate spreads in the third quarter of 2004 from the rapid succession of increases in the target interest rate by the Federal Reserve.

State Street realized securities gains of $19 million in the first nine months of 2004, compared with gains of $29 million in the first nine months of the prior year.

Operating Expenses

Operating expenses for the first nine months of 2004 were $2.77 billion, down $27 million from a year ago, and included $50 million of merger and integration costs. Operating expenses for the first nine months of 2003 were $2.79 billion, and included restructuring charges of $295 million, merger and integration costs of $81 million and expenses related to the divested PAM business of $34 million. Excluding merger and integration costs from both years, and in 2003, excluding restructuring costs and expenses related to PAM, operating-basis operating expenses in 2004 were $2.72 billion, up $333 million, or 14%, from 2003. The increase is due, in large part, higher incentive compensation costs, transaction processing expenses and professional fees.

Salaries and employee benefits expense was $1.45 billion in the first nine months of 2004, compared with $1.29 billion in 2003 on a reported basis, or $1.28 billion excluding $18 million related to PAM. The increase in salaries and employee benefits expense is primarily attributable to higher incentive compensation expense due to the Corporation's improved earnings performance in 2004.

Information systems and communications expense for the first nine months of 2004 was $396 million, down $14 million from a year ago on a reported basis and down $13 million from a year ago on an operating basis.

Transaction processing services expense increased $63 million to $294 million due to substantially higher global clearance fees expense related to higher volumes of transactions.

Occupancy expense for the first nine months of 2004 was $262 million, up $31 million on a reported basis, or $35 million on an operating basis from the first nine months of 2003. The increase in occupancy expense is primarily attributable to additional space at State Street Financial Center, located in Boston, Massachusetts, and new office space in Luxembourg.

Merger and integration costs totaled $50 million for the quarter, down from $81 million a year earlier. These expenses consisted primarily of professional fees and systems integration costs incurred related to the GSS acquisition.

Other operating expenses in the first nine months of 2004 were $319 million, compared with $252 million a year earlier on a reported basis and $242 million a year earlier on an operating basis. State Street recorded a provision for securities processing losses of $31 million in the first nine months of 2004. This compared to $5 million in the first nine months of 2003. Increases in the costs of professional services and a full nine months of GSS-related expenses also contributed to the increase. During the first nine months of 2004, State Street reclassified $25 million of reserves for off-balance sheet commitments from the allowance for loan losses to other liabilities. Subsequent to the reclassification, State Street reduced its reserve for off-balance sheet commitments, reducing other expenses by $10 million.

Income Taxes

State Street recorded tax expense of $299 million for the first nine months of 2004, compared to $159 million in the first nine months of 2003. Tax expense for the first nine months of 2004 included a

36



cumulative benefit of $18 million resulting from a change in the effective state tax rate applied to leveraged leasing transactions. The reduction in effective state tax rate reflects the relative increase in non-U.S. activity resulting from State Street's recent acquisitions and divestitures. Tax expense for the first nine months of 2003 included a one-time $12 million after tax charge for a REIT-related state tax matter.

The effective rate for the first nine months of 2004 was 32.8%, including the impact of the leveraged lease adjustment. The expected tax rate for the full year 2004 is 33.0%, compared with an effective tax rate of 35.1% in 2003, which included the settlement of the state tax matter.

GSS Acquisition Update

On January 31, 2003, State Street completed the primary closing of its acquisition of a substantial part of the Global Securities Services ("GSS") business of Deutsche Bank AG ("Deutsche Bank") for a premium of $1.10 billion. In July 2003, separate closings were held for the GSS business units in Italy and Austria, upon receipt of regulatory approvals. Under the terms of the sale and purchase agreement, State Street could have been required to make contingent additional purchase price payments. During the second quarter of 2004, State Street and Deutsche Bank determined that under the terms of the sale and purchase agreement, no additional consideration is payable by State Street.

Excluding merger and integration costs, State Street's first nine months of 2004 included $.08 per share of net income attributable to the GSS business compared with a loss of $.01 per share a year earlier. Based on current estimates, State Street now believes that the total GSS business will contribute between $0.08 to $0.10 in operating earning per diluted share for 2004. The GSS business contributed $465 million to revenue in the first nine months of 2004, net of financing costs, compared with $405 million in the prior year, and added $383 million of expenses in 2004, compared with $374 million in the first nine months of 2003. This comparison reflects eight months of recorded operating activity in 2003 for the GSS business acquired on January 31, 2003, compared with nine full months in 2004.

Merger and integration costs related to client conversions were $50 million for the first nine months of 2004. State Street estimates merger and integration costs of approximately $50 to $60 million for the full year 2004. The Corporation expects to substantially complete worldwide client conversions by the end of 2004, with the exception of Germany, which is expected to be completed by the end of 2005.

Acquisitions and Divestitures

In July 2002, State Street completed the purchase of International Fund Services, a leading provider of fund accounting and administration as well as securities trade support and operational services for hedge funds. In connection with this transaction, an additional $60 million of the purchase price was recorded as goodwill during the second quarter of 2004 based upon certain performance measures with payment made in the third quarter of 2004. Final settlement, which will occur in 2005, could require State Street to make another payment of up to $60 million.

In October 2004, State Street announced its intent to divest its ownership interest in Bel Air Investment Advisors LLC. This divestiture will likely occur in the first half of 2005, resulting in a pretax charge of approximately $150 to $170 million.

Lines of Business

State Street has two primary lines of business—Investment Servicing and Investment Management.

Investment Servicing provides services for U.S. mutual funds, collective funds worldwide, corporate and public retirement plans, insurance companies, foundations, endowments, and other investment pools. Products include custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; recordkeeping; foreign exchange and trading services; securities lending; deposit and short-term investment facilities; loans and lease financing; investment operations outsourcing;

37



wealth manager and hedge fund manager services; and performance, risk and compliance analytics to support institutional investors. State Street has a 50% interest in Boston Financial Data Services, Inc. and the International Financial Data Services group of companies, which provide shareholder services, including mutual fund and collective fund shareholder accounting. Revenue from Investment Servicing comprised 85% of State Street's total revenue for the nine months ended September 30, 2004.

Investment Management offers a broad array of services for managing financial assets, including investment management and investment research, primarily for institutional investors worldwide. These services included passive and active U.S. and non-U.S. equity and fixed income strategies, and other related services, such as securities lending. Retirement benefit services are provided through CitiStreet, LLC, in which State Street has a 50% interest. Revenue from the Investment Management line of business comprised 15% of State Street's total revenue for the nine months ended September 30, 2004.

Business Divesture consisted of revenue and expenses related to the Private Asset Management operations sold in October 2003.

Other/One-Time charges for 2004 consisted of merger and integration costs related to the acquisition of GSS; Other/One-Time charges for 2003 consisted of restructuring, merger and integration costs included in operating expenses and for the nine months ended September 30, 2003, included the loss on the sale of certain real estate included in processing fees and other revenue.

The total columns represent consolidated results in accordance with accounting principles generally accepted in the United States as they appear in the Consolidated Statements of Income.

Results for the Three Months Ended September 30, 2004 and 2003

 
  Investment
Servicing

  Investment
Management

  Business
Divestiture

  Other/
One-Time

   
   
 
 
  Total
 
(Dollars in millions,
except where otherwise noted)

 
  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
 
Fee Revenue:                                                            
Servicing fees   $ 568   $ 505                                     $ 568   $ 505  
Management fees           $ 156   $ 122       $ 19                 156     141  
Securities lending     39     51     9     10                         48     61  
Foreign exchange trading     75     101                                 75     101  
Brokerage fees     31     28                                 31     28  
Processing fees and other     71     83     12     9                         83     92  
   
 
 
 
 
 
 
 
 
 
 
Total fee revenue     784     768     177     141         19                 961     928  
Net interest revenue after provision for loan losses     202     195     11     8                         213     203  
Gains on the sales of available-for-sale investment securities, net         (5 )                                   (5 )
   
 
 
 
 
 
 
 
 
 
 
Total Revenue     986     958     188     149         19                 1,174     1,126  
Operating Expenses     754     666     136     115         11   $ 16   $ 29     906     821  
   
 
 
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes   $ 232   $ 292   $ 52   $ 34       $ 8   $ (16 ) $ (29 ) $ 268   $ 305  
   
 
 
 
 
 
 
 
 
 
 
Pre-tax margin     24 %   31 %   28 %   23 %                                  
Average assets (in billions)   $ 93.0   $ 79.6   $ 2.8   $ 2.1       $ .1               $ 95.8   $ 81.8  

Investment Servicing

Total revenue for the three months ended September 30, 2004, increased $28 million to $986 million, up 3% from the comparable period in 2003, driven by growth in fee revenue.

Growth in fee revenue of $16 million for the third quarter of 2004 to $784 million was primarily attributable to servicing fees, largely offset by declines in securities lending and foreign exchange trading

38



revenue. Servicing fees, securities lending, foreign exchange trading and brokerage fee revenue for this line of business are virtually identical to the consolidated results of the Corporation. See the fee revenue section of the consolidated results for the three months ended September 30, 2004 and 2003 for further details.

Net interest revenue after provision for loan losses for the third quarter of 2004 was $202 million, up $7 million from the third quarter of 2003. A decline in interest rate spreads largely offset the increase in net interest revenue attributable to increased average balance sheet volumes.

Operating expenses for the third quarter of 2004 were $754 million, up $88 million from the prior year. The majority of the increase was attributable to higher incentive compensation costs related to the Corporation's year-to-date improvement in earnings, growth in transaction processing costs and higher professional services costs related to growth initiatives and regulatory compliance requirements.

Investment Management

Total revenue for the third quarter of 2004 was $188 million, up $39 million, from $149 million reported in the third quarter of 2003, primarily attributable to growth in management fees.

Management fees from investment management services, delivered through State Street Global Advisors, were $156 million in the third quarter of 2004 compared to $122 million a year ago, and are identical to the consolidated results of the Corporation. See the fee revenue section of the consolidated results for the three months ended September 30, 2004 and 2003 for further details.

Operating expenses for the three months ended September 30, 2004, were $136 million, up from $115 million a year ago, primarily attributable to higher incentive compensation costs.

Results for the Nine Months Ended September 30, 2004 and 2003

 
  Investment
Servicing

  Investment
Management

  Business
Divestiture

  Other/
One-Time

   
   
 
  Total
(Dollars in millions,
except where otherwise noted)

  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
  2004
  2003
Fee Revenue:                                                          
Servicing fees   $ 1,693   $ 1,425                                     $ 1,693   $ 1,425
Management fees           $ 456   $ 341       $ 55                 456     396
Securities lending     163     162     38     30                         201     192
Foreign exchange trading     309     276                                 309     276
Brokerage fees     112     85                                 112     85
Processing fees and other     206     215     42     22         1         $ (13 )   248     225
   
 
 
 
 
 
 
 
 
 
Total fee revenue     2,483     2,163     536     393         56           (13 )   3,019     2,599
Net interest revenue after provision for loan losses     612     572     30     28                       642     600
Gains on the sales of available-for-sale investment securities, net     19     29                               19     29
   
 
 
 
 
 
 
 
 
 
Total Revenue     3,114     2,764     566     421         56           (13 )   3,680     3,228
Operating Expenses     2,294     2,032     423     352         34   $ 50     376     2,767     2,794
   
 
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes   $ 820   $ 732   $ 143   $ 69       $ 22   $ (50 ) $ (389 ) $ 913   $ 434
   
 
 
 
 
 
 
 
 
 
Pre-tax margin     26 %   26 %   25 %   16 %                                
Average assets (in billions)   $ 92.0   $ 79.0   $ 2.6   $ 1.9       $ .1               $ 94.6   $ 81.0

39


Investment Servicing

Total revenue for the nine months ended September 30, 2004, increased $350 million to $3.11 billion, up 13% from the comparable period in 2003, driven by growth in servicing fees, foreign exchange trading revenue and brokerage fee revenue and net interest revenue. Growth in revenue for this line of business reflects a full nine months of GSS business in 2004, compared with eight months in 2003 for the business acquired January 31, 2003.

Growth in fee revenue of $320 million for the first nine months of 2004 to $2.48 billion was primarily attributable to servicing fees, foreign exchange trading and brokerage fee revenue. Servicing fees, securities lending, foreign exchange trading and brokerage fee revenue for this line of business are virtually identical to the consolidated results of the Corporation. See the fee revenue section of the consolidated results for the nine months ended September 30, 2004 and 2003 for further details.

Net interest revenue after provision for loan losses for the first nine months of 2004 was $612 million, up $40 million from the first nine months of 2003. Net interest revenue for the first nine months of 2004 was reduced due to lower interest rate spreads as a result of rapid rate increases in third quarter and a cumulative charge of $19 million resulting from a change in assumptions used for recognition of income from leveraged lease transactions due to a change in the effective state tax rate. However, these factors were more than offset by increased earnings resulting from an increase in the average balance sheet in 2004 and a steeper U.S.-dollar yield curve in the first two quarters of 2004.

Operating expenses for the first nine months of 2004 were $2.29 billion, up $262 million from the prior year. The majority of the increase was attributable to higher incentive compensation, transaction processing and professional services costs.

Investment Management

Total revenue for the first nine months of 2004 was $566 million, up $145 million, from $421 million reported in the first nine months of 2003, driven by growth in management fees.

Management fees from investment management services, delivered through State Street Global Advisors, were $456 million in the first nine months of 2004 compared to $341 million a year ago, and are identical to the consolidated results of the Corporation. See the fee revenue section of the consolidated results for the nine months ended September 30, 2004 and 2003 for further details.

Operating expenses for the nine months ended September 30, 2004, were $423 million, up from $352 million a year ago, largely driven by higher incentive compensation expense.

Financial Goals and the Factors That May Affect Them

State Street has announced revised financial goals for the Corporation. The revised goals are (1) annual growth in operating earnings per share of 10% to 15%, (2) annual operating revenue growth of 8% to 12%, and (3) annual operating return on stockholders' equity of 14% to 17%.

40


State Street considers these to be financial goals, not projections or forward-looking statements. However, the discussion in this Management's Discussion and Analysis of Financial Condition and Results of Operation, and in other portions of this report on Form 10-Q, may contain statements that are considered "forward-looking statements" within the meaning of the federal securities laws. These statements may be identified by such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will," or similar statements or variations of such terms. The Corporation's financial goals and such forward-looking statements involve certain risks and uncertainties, including the issues and factors listed below and factors further described in conjunction with the forward-looking information, which could cause actual results to differ materially. The following issues and factors should be carefully considered. The forward-looking statements contained in this report speak only as of the time the statements were given. The Corporation does not undertake to revise those forward-looking statements to reflect events after the date of this report.

Cross-border Investing.    Increased cross-border investing by clients worldwide benefits State Street's revenue. Future revenue may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by clients. Economic and political uncertainties resulting from terrorist attacks, subsequent military actions or other events could result in decreased cross-border investment activities.

Savings Rates of Individuals.    State Street generally benefits when individuals invest their savings in mutual funds and other collective funds or in defined contribution plans. Changes in savings rates or investment styles may affect revenue. If there is a decline in the savings rates of individuals, or if there is a change in investment preferences that leads to fewer investments in mutual funds, other collective funds, and defined contribution plans, State Street's revenue may be adversely affected.

Asset Values in Worldwide Financial Markets.    As asset values in worldwide financial markets increase or decrease, State Street's opportunities to invest and service financial assets may change. Since a portion of the Corporation's fees is based on the value of assets under custody and management, fluctuations in the valuation of worldwide securities markets will affect revenue. State Street estimates that a 10% increase or decrease in worldwide equity values would result in a corresponding change in State Street's total revenue of approximately 2%. If fixed income security values worldwide were to increase or decrease by 10%, State Street would anticipate a corresponding change of approximately 1% in its total revenue.

As asset values increase or decrease due to external credit factors, State Street has exposure related to its own investing activities. The impact of such exposure would be reflected in the Corporation's statement of income, statement of condition and statement of changes in stockholders' equity.

Dynamics of Markets Served.    Changes in markets served, including the growth rate of collective funds worldwide, outsourcing decisions, mergers, acquisitions and consolidations among clients and competitors and the pace of debt and equity issuance, can affect revenue. In general, State Street benefits from increases in the volume of financial market transactions serviced.

State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation's business—including volatile currencies, pace of inflation, changes in monetary policy, changes in domestic and international banking supervisory regulations including capital requirements, and social and political instability—could affect results of operations. The terrorist attacks that took place in the United States on September 11, 2001, and subsequent military action and terrorist activities, have caused economic and political uncertainties. These activities and the national and global efforts to combat terrorism, and other military activities and outbreaks of hostilities have affected and may further adversely affect economic growth, and may have other adverse effects on many companies, including State Street, in ways that are not predictable. Financial reporting irregularities involving large and well-known companies and regulatory investigations of securities and mutual fund industry practices and behavior may have adverse effects on State Street in ways that are not predictable. State Street is broadly involved with the securities industry including, in particular,

41



the mutual fund industry, and governmental agencies have sought information from it in connection with investigations relating to that industry.

Legislation may cause changes in the competitive environment in which State Street operates, which could include, among other things, broadening the scope of activities of significant competitors, or facilitating consolidation of competitors into stronger entities, or attracting new large and well-capitalized competitors into State Street's traditional businesses. Such factors and changes, and the ability of the Corporation to address and adapt to the regulatory and competitive challenges, may affect future results of operations.

On June 26, 2004, the Basel Committee on Banking Supervision released the final version of its capital adequacy framework ("Basel II"). Basel II's framework includes minimum capital requirements, including a capital charge for operational risk. U.S. banking regulatory agencies must now apply international risk-based capital guidance to rules to be implemented in the U.S. The U.S. regulatory agencies are expected to release proposed new rules for comment by mid-2005, with the final version anticipated by mid-2006. The new rules as applied in the U.S. are expected to become effective by January 1, 2007, subject to transitional implementation arrangements, and will become fully operational by January 1, 2008. Mandatory compliance will be required for large, internationally-active U.S. institutions, such as State Street. In preparation for compliance, the Corporation has developed a comprehensive implementation program to monitor the status and progress of Basel II, and is in the process of implementing the requirements and assessing the potential impact of Basel II on the Corporation. At this time, the Corporation cannot predict the final form of the rules in the U.S., nor their impact on the Corporation's risk-based capital.

Accounting Principles.    Changes in accounting principles generally accepted in the United States applicable to State Street could have a material impact on the Corporation's reported results of operations. While such changes may not have an economic impact on the business of State Street, these changes could affect the attainment of the current measures of the Corporation's financial goals.

Tax Legislation.    Changes in tax legislation or the interpretation of existing tax laws worldwide could have a material impact on the Corporation's reported results of operations.

Interest Rates.    The levels of market interest rates, the shape of the yield curve and the direction and speed of interest rate changes relative to the geographic mix of interest-bearing assets and liabilities affect net interest revenue and securities lending revenue. In the short term, State Street's net interest revenue and securities lending revenue benefit from falling interest rates and are negatively affected by rising interest rates because interest-bearing liabilities reprice sooner than interest-earning assets. The rate of adjustment to higher or lower rates will depend on the relative duration of assets and liabilities. In general, sustained lower interest rates and a flat yield curve have a constraining effect on net interest revenue and securities lending revenue growth. Market interest rates also impact the value of certain derivative products whose change in value is reflected in processing fees and other in the Consolidated Statement of Income.

Liquidity.    Any occurrence that may limit the Corporation's access to the funds markets, such as a decline in the confidence of debt purchasers, depositors or counterparties participating in the funds markets in general or with State Street in particular, or a downgrade of State Street's debt rating, may adversely affect State Street's ability to raise capital and, in turn, its liquidity.

Capital.    Under regulatory capital adequacy guidelines, State Street and State Street Bank must meet guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items. Failure to meet minimum capital requirements could have a direct material effect on State Street's financial condition; failure to maintain the status of "well capitalized" under the regulatory framework could affect State Street's status as a financial holding company and eligibility for a streamlined review process for acquisition proposals.

In addition, failure to maintain the status of "well capitalized" could affect the confidence of State Street's clients in the Corporation and could adversely affect its business. In addition to being well-capitalized,

42



State Street and State Street Bank are subject to guidelines that involve qualitative judgments by regulators about the entities' status as well-managed and the entities' compliance with Community Reinvestment Act obligations.

Federal laws and related regulations limit the amount that banks, including State Street Bank, may invest in international subsidiaries. This limitation may affect the pace of future international expansion by State Street Bank through this type of subsidiary.

Volatility of Currency Markets.    The degree of volatility in foreign exchange rates can affect foreign exchange trading revenue. In general, State Street benefits from currency volatility. Accordingly, foreign exchange revenue is likely to decrease during times of decreased currency volatility. In addition, as State Street's business grows globally, State Street's exposure to changes in foreign currency exchange rates could impact State Street's level of revenue and expense and net income and the value of State Street's investments in its non-U.S. operations.

Pace of Pension Reform.    State Street expects its business 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. If the pace of pension reform and resulting programs, including public and private pension schemes, slows down or if pension reform does not occur, revenue growth may be adversely affected.

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, customer pricing reviews and the introduction of new products into the marketplace.

Pace of New Business; Business Mix.    A decline in the pace at which State Street attracts new clients, and the pace at which existing and new clients use additional services and assign additional assets to State Street for management or custody, may adversely affect future revenue and earnings growth. A decline in the rate at which clients outsource functions, such as their internal accounting activities, could also adversely affect revenue and earnings growth. In addition, changes in business mix and in the source of revenue, including the mix of U.S. and non-U.S. business, may affect future results of operations, depending on the economic and competitive conditions of those geographic areas at the time.

Business Continuity.    State Street has business continuity and disaster recovery plans in place. However, external events, including terrorist or military actions and resulting political and social turmoil, could arise that would cause unforeseen damage to State Street's physical facilities or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, State Street's clients, vendors and counterparties could suffer from such events. Should these events affect State Street, or the clients, vendors or counterparties with which it conducts business, State Street's results of operations could be adversely affected.

Rate of Technological Change.    Technological change often 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 straight-through-processing, will result in changes to existing procedures. Alternative delivery systems have emerged, including the widespread use 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.

The risks inherent in this process include rapid technological change in the industry, the Corporation's ability to access technical and other information from clients, and the significant and ongoing investments required to bring new services to market in a timely fashion at competitive prices. A further risk is the introduction by competitors of services that could replace or provide lower-cost alternatives to State Street services.

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State Street uses 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. Despite these efforts, State Street cannot be certain that the steps taken by it to prevent unauthorized use of proprietary rights are sufficient to prevent misappropriation of technology, particularly outside the United States where laws or law enforcement practices may not protect proprietary rights as fully as in the United States. In addition, no assurance can be given that the courts will adequately enforce contractual agreements that State Street has entered into to protect its proprietary technology. If any of its proprietary information were misappropriated by or otherwise disclosed to its competitors, State Street's competitive position could be adversely affected. 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, Alliances and Divestitures.    Acquisitions of complementary businesses and technologies and development of strategic alliances and divestitures of portions of its business are an active part of State Street's overall business strategy. The Corporation has completed several acquisitions, alliances and divestitures in recent years. However, there can be no assurance that services, technologies, key personnel or businesses of acquired companies will be effectively assimilated into State Street's business or service offerings or that alliances will be successful. In addition, State Street may not be able to successfully complete any divestiture on satisfactory terms, if at all, and divestitures may result in a reduction of total revenue and net income.

FINANCIAL CONDITION

Credit Quality

At September 30, 2004, total gross loans were $5.55 billion. At quarter end, the allowance for loan losses was $36 million, down from $61 million a year ago due to a first quarter reclassification of reserves for off-balance sheet commitments from the allowance for loan losses to other liabilities. During the first quarter, subsequent to the reclassification, the reserve for off-balance sheet commitments was reduced by $10 million based on management's assessment of risk in these exposures. For the nine months ended September 30, 2004, no provision for loan losses was charged against income; there were no charge-offs and no recoveries. Non-performing assets at September 30, 2004, were $7 million, all of which were non-performing investment securities.

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, including accommodating the transaction and cash management requirements of its clients. Liquidity is provided by State Street's access to global debt markets, its ability to gather additional deposits from its clients, maturing short-term assets, sales of securities, and repayment of clients' loans. Client deposits and other funds provide multi-currency, geographically diverse sources of liquidity. During the third quarter of 2004, State Street increased its maximum commercial paper issuance from $1.00 billion to $3.00 billion.

State Street maintains a large portfolio of liquid assets. As of September 30, 2004, the Corporation's defined liquid assets were $87.02 billion or 87% of total assets, the vast majority of which can be sold on the open market to meet liquidity needs. At September 30, 2004, State Street had defined short-term liabilities of $86.01 billion, which included deposits and borrowings with maturities of less than a year. State Street had $21 million in pre-tax net unrealized losses on available-for-sale investment securities at September 30, 2004, which the Corporation does not consider to be other than temporary.

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 supporting clients' cash management needs.

44



As a state-chartered bank and member of the Federal Reserve System, State Street Bank, State Street's principal subsidiary, is primarily 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 levels required for the "well-capitalized" category, the highest of the Federal Reserve Board's five capital categories. 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. State Street's capital management emphasizes risk exposure rather than asset levels.

At September 30, 2004, the Corporation's Tier 1 risk-based capital ratio was 13.3% and State Street Bank's Tier 1 risk-based capital ratio was 11.5%. These ratios are down from 14.0% for the Corporation and 12.4% for State Street Bank at year-end 2003, primarily due to a change in balance sheet mix. At September 30, 2004, both ratios significantly exceeded the regulatory minimum of 4% and the well-capitalized threshold of 6%. State Street and State Street Bank had Tier 1 leverage ratios of 5.6% and 5.3%, respectively, at September 30, 2004, exceeding the regulatory minimum of 3% and the well-capitalized threshold of 5%. See Note 7 to the Notes to Consolidated Financial Statements for further information.

On June 26, 2004, the Basel Committee on Banking Supervision released the final version of its capital adequacy framework ("Basel II"). Basel II's framework includes minimum capital requirements, including a capital charge for operational risk. U.S. banking regulatory agencies must now apply international risk-based capital guidance to rules to be implemented in the U.S. The U.S. regulatory agencies are expected to release proposed new rules for comment by mid-2005, with the final version anticipated by mid-2006. The new rules as applied in the U.S. are expected to become effective by January 1, 2007, subject to transitional implementation arrangements, and will become fully operational by January 1, 2008. Mandatory compliance will be required for large, internationally-active U.S. institutions, such as State Street. In preparation for compliance, the Corporation has developed a comprehensive implementation program to monitor the status and progress of Basel II, and is in the process of implementing the requirements and assessing the potential impact of Basel II on the Corporation. At this time, the Corporation cannot predict the final form of the rules in the U.S., nor their impact on the Corporation's risk-based capital.

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. As of September 30, 2004, 8.3 million shares may be purchased under the stock purchase program. In October 2004, State Street announced it was re-activating its stock purchase program, which had been relatively inactive since the January 2003 acquisition of a substantial part of the Deutsche Bank GSS business. State Street employs a third-party broker-dealer to acquire shares on the open market for the Corporation's stock purchase program.

During the third quarter of 2004, State Street entered into forward foreign currency swaps with a basis of €300 million, or approximately $373 million, to hedge the Corporation's net foreign investment in certain non-U.S. subsidiaries and manage the volatility in stockholders' equity that results from translation gains and losses. As a result, less than $1 million of translation gains for certain non-U.S. subsidiaries were offset by a loss on the hedge contract within the category foreign currency translation, recorded as a component of accumulated other comprehensive income in stockholders' equity.

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 foreign-exchange forward contracts, foreign exchange and interest rate options, and interest rate swaps. As of September 30, 2004, the notional amount of these derivative instruments was $381.93 billion, of which $331.74 billion were 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.

45


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 nine months ended September 30,

(Dollars in millions)

  Average
  Maximum
  Minimum
2004:                  
Foreign exchange products   $ 1.2   $ 3.5   $ .3
Interest rate products     1.7     3.0     1.0

2003:

 

 

 

 

 

 

 

 

 
Foreign exchange products   $ 1.0   $ 2.6   $ .4
Interest rate products     1.7     2.8     1.2

State Street compares actual daily profits and losses from trading activities to estimated one-day value at risk. During the first nine months of 2004, State Street did not experience any trading losses in excess of its end-of-day value at risk estimate.

CRITICAL ACCOUNTING ESTIMATES

The Securities and Exchange Commission ("SEC") issued disclosure guidance for "critical accounting estimates." The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

State Street's significant accounting policies are described in detail in Note 1 in the Notes to the Consolidated Financial Statements as included in State Street's Annual Report on Form 10-K for the year ended December 31, 2003, and have been updated in Note 1 to the consolidated financial statements included in this Quarterly Report on Form 10-Q. State Street's critical accounting estimates are described in management's discussion and analysis of results of operations and financial condition as included in State Street's Annual Report on Form 10-K for the year ended December 31, 2003. There have not been any significant changes in the factors or methodology used by management in determining its critical accounting estimates since December 2003, that are material in relation to the Corporation's financial condition, changes in financial condition and results of operations.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See information under the caption "Trading Activities: Foreign Exchange and Interest Rate Sensitivity" on pages 45-46.

State Street's Risk Management function was described in detail in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003.


ITEM 4.    CONTROLS AND PROCEDURES

The Corporation has established and maintains disclosure controls and other procedures that are designed to ensure that material information relating to the Corporation and its subsidiaries required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Corporation's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. For the period covered in this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and

46



procedures. Based on that evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective as of September 30, 2004.

In the ordinary course of business, the Corporation routinely enhances its internal controls and procedures for financial reporting by either upgrading its current systems or implementing new systems. In addition, the Corporation is currently in the process of reviewing and formalizing its internal controls and procedures for financial reporting in accordance with SEC rules implementing the internal control reporting requirements included in Section 404 of the Sarbanes-Oxley Act of 2002. Changes have been made and will be made to the Corporation's internal controls and procedures for financial reporting as a result of these efforts. However, the Chief Executive Officer and Chief Financial Officer have concluded that there were no changes in the Corporation's internal control over financial reporting identified in connection with the evaluation described in the preceding paragraph that occurred during the quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.

47



PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The following disclosure supplements the disclosure in the Corporation's Current Report on Form 8-K filed March 9, 2004, and the Corporation's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004:

The Corporation continues to respond to subpoenas from the SEC and to examinations, inquiries and requests for information from the SEC, the Department of Labor, and other regulatory and law enforcement agencies, relating to the securities industry, including in particular mutual fund-related matters.


ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)  State Street's Board of Directors has authorized a publicly-announced stock purchase program for State Street Common Stock for use in employee benefit programs and for general corporate purposes. The program was first announced in 1995 and has been increased several times, most recently in December 2001. As of September 30, 2004, the number of shares purchased under the program aggregated 34,689,000, and authorization for the purchase of an additional 8,311,000 shares remained available for purchase under the program. State Street employs a third-party broker-dealer to acquire shares on the open market for the Corporation's stock purchase program. There were no shares purchased under the publicly-announced stock purchase program in the quarter ended September 30, 2004. Additionally, shares may be acquired in open market purchases by a third-party trustee for a consolidated trust for deferred compensation plans that are not part of the publicly-announced stock purchase program. There were no shares purchased by the trust in the quarter ended September 30, 2004. The following table discloses purchases of Common Stock by the Corporation and related information for the three months ended September 30, 2004:

(Shares in thousands)

  Number of
Shares
Purchased

  Average
Price Per
Share

  Number of
Shares
Purchased Under
Publicly-
Announced
Program

  Maximum Number of
Shares Yet to Be
Purchased Under
Program

July 1–July 31, 2004     $     8,311
August 1–August 31, 2004           8,311
September 1–September 30, 2004           8,311
   
       
   
            8,311
   
       
   

48



ITEM 6.    EXHIBITS

Exhibit
Number

   
   
10.1   Form of Performance Award agreement under the 1997 Equity Incentive Plan    

10.2

 

Form of Performance Award deferral election agreement under the 1997 Equity Incentive Plan

 

 

10.3

 

Form of Non-Qualified Stock Option Award agreement under the 1997 Equity Incentive Plan

 

 

10.4

 

Form of Incentive Stock Option Award agreement under the 1997 Equity Incentive Plan

 

 

10.5

 

Form of Restricted Stock Award agreement under the 1997 Equity Incentive Plan

 

 

10.6

 

Form of Deferred Stock Award to Non-Employee Directors under the 1997 Equity Incentive Plan

 

 

12

 

Ratio of earnings to fixed charges

 

 

15

 

Letter regarding unaudited interim financial information

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) Certification

 

 

32

 

Section 1350 Certifications

 

 

49



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: November 5, 2004

 

By:

/s/  
EDWARD J. RESCH      
Edward J. Resch,
Executive Vice President
and Chief Financial Officer

Date: November 5, 2004

 

By:

/s/  
PAMELA D. GORMLEY      
Pamela D. Gormley,
Executive Vice President and Controller

50



EXHIBIT INDEX

(filed herewith)


10.1

 

Form of Performance Award agreement under the 1997 Equity Incentive Plan

10.2

 

Form of Performance Award deferral election agreement under the 1997 Equity Incentive Plan

10.3

 

Form of Non-Qualified Stock Option Award agreement under the 1997 Equity Incentive Plan

10.4

 

Form of Incentive Stock Option Award agreement under the 1997 Equity Incentive Plan

10.5

 

Form of Restricted Stock Award agreement under the 1997 Equity Incentive Plan

10.6

 

Form of Deferred Stock Award to Non-Employee Directors under the 1997 Equity Incentive Plan

12

 

Ratio of earnings to fixed charges

15

 

Letter regarding unaudited interim financial information

31.1

 

Rule 13a-14(a)/15d-14(a) Certification

31.2

 

Rule 13a-14(a)/15d-14(a) Certification

32

 

Section 1350 Certifications

51




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Exhibit 10.1

STATE STREET CORPORATION
225 Franklin Street
Boston, MA 02110


Notification of Grant of Performance Award

March 3, 2004

Re:
Performance Award

Dear                        :

This letter shall serve as an agreement between you and State Street Corporation (the "Company") setting forth the terms and conditions relating to the Performance Award granted to you under the Company's 1997 Equity Incentive Plan, as amended (the "Plan"), if certain performance targets are met during designated performance periods.

1.     Grant of Performance Award.

You have been granted an Award consisting of            units (a "Performance Award") entitling you to payment as described below upon satisfaction of the terms and conditions of this Award. The Award has been granted with respect to the performance period (the "Performance Period") commencing January 1, 2004 and ending on December 31, 2005 (the "Maturity Date").

2.     Performance Targets: Committee Certification.

Your Performance Award shall be earned as follows:

(a) Earnings Per Share (EPS). Seventy percent (70%) of the Performance Awards granted (            ) shall be earned based upon the Company's fully diluted aggregated earnings per share (EPS), as reported, during the Performance Period.

(b) Return on Equity (ROE). Thirty percent (30%) of the Performance Awards granted (            ) shall be based on the Company's average return on common stockholders' equity (ROE), as reported, during the Performance Period.

The specific EPS and ROE targets were established by the Committee on March 3, 2004 and are attached. Achievement of the specific performance target(s) will be a condition to the earning of any payment under this Award. The earning of the Award is also conditioned upon Committee certification, following the close of the Performance Period, that the specific performance targets have been achieved.

3.     Form of Payment.

(a) Each Performance Award is payable in cash, on or before the March 31st next following the end of the Performance Period, in an amount equal to the fair market value of one share of the Company's common stock, $1.00 par value (the "Common Stock"). For this purpose, fair market value shall mean the average of the closing high and low prices of the Common Stock on the ten trading days preceding the end of the Performance Period.

(b) Upon your request made prior to January 1st of the year of the end of the Performance Period, payment under this Award may be deferred on such terms and for such period as the Committee may approve. The deferred amount will be credited to the Restoration & Voluntary Deferral Plan.



4.     Non-Transferability, Etc.

The Award, including Performance Awards represented thereby, shall not be transferable otherwise than by will or the laws of descent and distribution.

5.     Termination of Employment

(a)
No amount shall be paid in respect of the Award in the event that you cease to be employed by the Company prior to the end of the Performance Period, except as the Committee may otherwise determine.

(b)
Any payment under the Award pursuant to an exercise by the Committee of its discretion under (a) above will take into account the time between the date your employment so terminated and the end of the Performance Period. In addition, payment to you of any unearned Performance Awards after termination of your employment otherwise than by reason of your death shall be subject to the conditions that until the Maturity Date you shall (i) not engage whether directly or indirectly, in any manner or capacity as advisor, principal, agent, partner, officer, director, employee, member of any association, or otherwise, in any business or activity which is at the time competitive with any business or activity conducted by the Company or any of its direct or indirect subsidiaries, and (ii) be available at reasonable times for consultations at the request of the Company's management with respect to phases of the business with which you were actively connected during your employment. In the event that either of the above conditions is not fulfilled, you shall receive no payment of the unearned Performance Award. Any determination by the Board of Directors [Committee] that you are, or have engaged in a competitive business or activity as aforesaid or not have been available for consultations as aforesaid shall be conclusive. Notwithstanding the foregoing this paragraph 5(c) shall be inapplicable following a Change of Control.

6.     Acceleration of Performance Award.

Notwithstanding anything in this Agreement to the contrary, in the event of a Change of Control occurring prior to the Maturity Date, you shall be entitled at the time of such Change of Control to receive a cash payment per Performance Award equal to the adjusted fair market value of a share of the Common Stock. For purposes of the preceding sentence, "adjusted fair market value" shall mean the higher of the (i) the highest average of the reported daily high and low prices per share of the Common Stock during the 60 day period prior to the first date of actual knowledge by the Board of Directors of a Change of Control, and (ii) if the Change of Control is the result of a transaction or series of transactions described in Section 7.4(b)(1) or (3) of the Plan, the highest price per share of the Common Stock paid in such transaction series of transactions (which in the case of a transaction described in Section 7.4(b)(1) of the Plan shall be the highest price per share of the Common Stock as reflected in a Schedule 13D filed by the person having made the acquisition.

7.     Changes in Capitalization or Corporate Structure.

The aggregate number of Performance Awards reflected in the Award shall be appropriately adjusted pursuant to Section 8.6 of the Plan to reflect transactions, events or circumstances described in said Section 8.6.

8.     Amendments to Performance Units.

Subject to the specific limitations set forth in the Plan, the Board of Directors [Committee] may at any time suspend or terminate any rights or obligations relating to Performance Awards prior to their Maturity Date without your consent.


9.     Compliance with Section 162(m).

The Committee shall exercise its discretion with respect to this award in all cases so as to preserve the deductibility of payments under the Award against disallowance by reason of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code).

10.   Provisions of the Plan.

The provisions of the Plan are incorporated herein by reference, and all terms not other wise defined herein shall have the meaning given to them in the Plan. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan shall control. You acknowledge that you have received a copy of the Plan [and a copy of the Prospectus for the Plan].

If the Award and the foregoing terms and conditions are acceptable to you, please sign the enclosed counterpart of this letter and return the same to the undersigned.

    Very Truly Yours,

 

 

STATE STREET CORPORATION

 

 

By


Boon Ooi
Senior Vice President

The undersigned hereby accepts the Award and the Performance Awards represented thereby on the terms and subject to the conditions set forth above.


 

 

 



Dated:

 





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Notification of Grant of Performance Award
EX-10.2 3 a2145272zex-10_2.htm EXHIBIT 10.2
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Exhibit 10.2

Election to Defer
Performance Award Payment

Executive Compensation Committee
State Street Corporation
225 Franklin Street
Boston, MA 02110

Attention:   Boon Ooi
Senior Vice President
Human Resources & Organizational Performance

Ladies and Gentlemen:

The undersigned is a participant (the "Participant") in the "1997 Equity Incentive Plan", Cycle    . Payments, if any, under the Plan with respect to such Cycle, unless deferred, are to be made on or before            (the "Payments"), subject to the provisions of paragraph 3(b) of the Performance Award Agreement between the undersigned and State Street dated            . Pursuant to said Plan and Agreement, the Participant hereby elects to defer (choose one):

(    ) $            (or 100% of the Payments, if less)

(    )            % of the Payments

(the deferred amount with interest thereon as provided below being the "Deferred Payment") until (Date), (Year) subject to the terms and conditions hereof.

This deferral of the Deferred Payment is made upon the following terms and conditions prescribed by the Executive Compensation Committee:

    1)
    Deferral Period.    The deferral period shall not be less than two years from            , nor more than ten years from such date.

    2)
    Lump Sum.    The Deferred Payment when paid will be paid in a single cash lump sum.

    3)
    Non-Assignable.    The Deferred Payment may not be assigned, transferred, pledged or encumbered. In the event of death of the undersigned prior to the complete distribution of the Deferred Payment, any portion of such Deferred Payment that has not been distributed shall be paid or distributed to:                         .

    4)
    Irrevocable Election.    The deferral is irrevocable except in the event of the Participant's death, other termination of the Participant's employment, or a Change in Control (as defined in the Plan). In the event of the Participant's death, the Deferred Payment will be made to the Participant's estate as soon as practicable following death. In the event of the Participant's termination of employment for any reason other than death, the Deferred Payment will be made to the Participant as soon as practicable after such termination of employment. Upon a Change in Control the Deferred Payment will be made to the Participant as soon as practicable after such event.

    5)
    Interest.    The amount deferred will accrue interest, annually, at a rate effective to the yield to maturity on the 360-day Treasury bill with an issue date closest to                        , and with issue dates closest to                        of each succeeding year. In no event, however, shall the interest payable with respect to the Deferred Payments be greater than the maximum interest rate, if any, permitted under Section 162(m) of the Internal Revenue Code of 1986, as amended, the regulations thereunder or interpretations thereof.

    6)
    Withholding.    The Deferred Payment shall be reduced by withholding taxes and other legally required deductions at the time of distribution.

    7)
    Reports.    State Street shall provide the Participant with a statement of the amount of the Deferred Payment (including the interest accrued thereon) as of the end of each calendar year.

    8)
    No Funding.    State Street will not fund the Deferred Payment. State Street's obligation to pay the Deferred Payment constitutes a mere promise to pay, will be paid solely from the general assets of State Street and the Participant's rights shall be only those of an unsecured general creditor.

    9)
    Limitation.    The deferral of the Deferred Payment shall not give the Participant any right to be retained as an employee.

The undersigned hereby agrees to the foregoing terms and conditions with respect to the Deferred Payment and by signing below intends and agrees to be legally bound thereby.

    Very Truly Yours,

 

 




Witness

 

 

Dated:  


 

 

 

 

The foregoing election is accepted.

 

 

        State Street Corporation

 

 


Boon Ooi
Senior Vice President

Dated:  


 

 



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EX-10.3 4 a2145272zex-10_3.htm EXHIBIT 10.3
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Exhibit 10.3

STATE STREET CORPORATION
1997 EQUITY INCENTIVE PLAN

Non-qualified Stock Option Award Agreement

Subject to your acceptance of the terms set forth in this agreement, State Street Corporation (the "Company") has awarded to you the option to purchase shares of common stock ("Stock") of the Company, detailed in your award Certificate on this website and pursuant to the State Street Corporation 1997 Equity Incentive Plan (the "Plan") and certain conditions set forth below (the "NQO Award Agreement"). A copy of the Plan document and the Company's Prospectus are located on this website for your reference. All terms used herein shall have the same meaning as in the Plan, except as otherwise expressly provided. The term "vest" as used herein means the lapsing of the restrictions described herein and in the Plan with respect to one or more options to purchase shares of Stock. The terms of the NQO Award Agreement are as follows:

1.
Term and Exercise Period. Subject to paragraphs 5 and 6 hereof and to this paragraph 1, the Option shall vest according to the vesting schedule detailed in your Certificate of Stock Option Grant on this website. In no event, however, shall the exercise of the Option or any installment thereof be made later than ten (10) years from the original grant date. You may not exercise the Option with respect to less than fifty (50) shares at any one time except when the number of remaining shares of the Option is less than fifty (50); and except as is otherwise provided herein you may not exercise the Option or any installment thereof unless you are then an employee of the Company or one of its subsidiaries.

2.
Method of Exercising Option. You may exercise the vested option before the grant expiration date by stating the number of shares (but not fewer than fifty (50) shares or the remaining shares under the Option, if fewer) which the exercise is intended to cover and paying in full for the aggregate grant price for such shares, in cash, or by certified or bank check. In lieu of a cash payment in full, you may pay the grant price through the delivery (including by attestation of ownership) of a whole number of shares of Common Stock of the Company held for at least six months with a fair market value equal to the grant price less any cash included in the tender. Payment for any shares subject to an Option may also be made by delivering a properly executed notice to the Company, together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the aggregate grant price, and, if required, the amount of any federal, state, local or foreign withholding taxes. Certificates for shares that you purchased shall be promptly delivered per your instructions to you or your broker.

3.
Employee Rights and Duties. You shall not have any right of a stockholder with respect to the shares covered by the Option prior to the issuance thereof nor shall this agreement grant you any rights of employment with the Company.

4.
Non-Transferability. The Option shall not be transferable otherwise than by will or the laws of descent and distribution and it may be exercised only by you during your lifetime. Any attempt to assign or transfer the Option, either voluntarily or involuntarily, contrary to the provisions hereof, shall be null and void and without effect and shall render the Option itself null and void.

5.
Termination of Employment.

a)
If your employment terminates by reason of disability (as set forth in Section 7.1 for the Plan) or retirement at or after the normal or early retirement age under any retirement plan or supplemental retirement agreement maintained by the Company or any subsidiary prior to exercise, expiration, surrender or cancellation of the Option, the Option shall remain exercisable after the date of such termination of employment in accordance with the Plan and this agreement whether or not such Option was exercisable at the time of such termination during the period that ends on the later of (i) one (1) year after the Option first becomes exercisable or if exercisable in

      installments after the last installment becomes exercisable; and (ii) one (1) year from termination of employment.

    b)
    If your employment terminates by reason of death, whether or not then exercisable, all Options held by you prior to termination may be exercised by your executor or administrator or the person(s) to whom the Option is transferred by law or the applicable laws of descent and distribution during the period that ends one year after the date of death. In no event, however, shall an Option remain exercisable beyond the grant expiration date.

    c)
    If your employment terminates for any reason other than death, disability or retirement prior to exercise, expiration, surrender or cancellation of the Option, such Option shall terminate three (3) months from the date of such termination, during which period the Option may be exercised only to the extent that it was exercisable on the date of such termination. In the event that the award recipient is eligible to receive severance when terminated from the Company, the Option shall continue to vest through the end of the "bridging period" as defined in the Company's severance policy; under such circumstances, the Option shall terminate three (3) months from the date the bridging period ends. If you die within such three (3) month period, the Option shall expire (1) year after the date of your termination, during which period the Option may be exercised at any time by the person or persons to whom your rights shall pass by will or by the applicable laws of descent or distribution, but only to the extent it was exercisable on the date of such termination. In no event, however, may the Option be exercised after the grant expiration date set out in the applicable Certificate.

    d)
    Your rights with respect to any unexercised Option after termination of your employment other than by reason of death shall be subject to the conditions that until any such Option is exercised you shall (i) not engage either directly or indirectly, in any manner or capacity as advisor, principal, agent, partner, officer, director, employee, member of any association, or otherwise, in any business or activity which is at the time competitive with any business or activity conducted by the Company or any of its direct or indirect subsidiaries, and (ii) be available at reasonable times for consultations at the request of the Company's management with respect to phases of the business with which you were actively connected during your employment. In the event that either of the above conditions is not fulfilled, you shall forfeit all rights to any unexercised Option. Any determination by the Board of Directors that you are, or have, engaged in a competitive business or activity as aforesaid or have not been available for consultations as aforesaid shall be conclusive. Notwithstanding the foregoing this paragraph shall be inapplicable following a Change of Control (as defined in the Plan).

6.
Acceleration of Options. Upon a Change of Control (as defined in the Plan), all Options outstanding as of the date of such Change of Control is determined to have occurred and which are not then exercisable shall become fully exercisable. Optionees subject to Section 16 shall have certain rights to receive cash in lieu of exercising the option in the amount of the Spread, all as set forth in the Plan; provided, that for purposes of this Option, "Spread" shall mean, with respect to any share subject to the Option, the excess of fair market value of such share on the date of exercise over the per-share grant price. After a Change of Control (but subject to Section 7.3 of the Plan), the Option shall remain exercisable following a termination of your employment other than by reason of your death, disability or retirement for a period of seven (7) months after termination of employment, or until expiration of the original term of the Option, whichever period is shorter.

7.
Changes in Capitalization. The Board of Directors of the Company may make appropriate adjustments in the aggregate number and kind of shares and the grant price per share subject to the Option when it deems such action necessary by reason of any stock dividend, split or any recapitalization, reclassification, merger, consolidation, combination or similar transaction.

8.
Withholding. The Committee will have the right to require that you remit to the Company an amount sufficient to satisfy any withholding tax requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Committee may permit you to elect at such time and in such

    manner as the Committee provides to satisfy your withholding tax requirement with the proceeds from the sale of shares resulting from your option exercise.

9.
Securities Act Considerations. The shares of Common Stock acquired by you upon exercise of the Option are registered under the Securities Act of 1933, as amended (the "Act"). Under current regulations, you may freely resell all or a part of such shares from time to time, provided you are not deemed to be an "affiliate" of the Company as that term is defined in the Act. Officers filing Forms 4—Statement of Changes in Beneficial Ownership are deemed to be affiliates. As an affiliate of the Company, you may resell such shares only pursuant to a currently effective registration statement on Form S-3 or Form S-1 as promulgated by the Securities and Exchange Commission, or pursuant to Rule 144 or other exemption under the Act.

By your accepting this agreement, this agreement shall take effect as a sealed instrument.




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Non-qualified Stock Option Award Agreement
EX-10.4 5 a2145272zex-10_4.htm EXHIBIT 10.4
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Exhibit 10.4

STATE STREET CORPORATION
1997 EQUITY INCENTIVE PLAN

Incentive Stock Option Award Agreement

Subject to your acceptance of the terms set forth in this agreement, State Street Corporation (the "Company") has awarded to you the option, qualifying as incentive stock options under Section 422(b) of the Internal Revenue Code, to purchase shares of common stock ("Stock") of the Company, detailed in your award Certificate on this website and pursuant to the State Street Corporation 1997 Equity Incentive Plan (the "Plan") and certain conditions set forth below (the "ISO Award Agreement"). A copy of the Plan document and the Company's Prospectus are located on this website for your reference. All terms used herein shall have the same meaning as in the Plan, except as otherwise expressly provided. The term "vest" as used herein means the lapsing of the restrictions described herein and in the Plan with respect to one or more options to purchase shares of Stock. The terms of the ISO Award Agreement are as follows:

    1.
    Term and Exercise Period. Subject to paragraphs 6 and 7 hereof and to this paragraph 1, the Option shall vest according to the vesting schedule detailed in your Certificate of Stock Option Grant. In no event, however, shall the exercise of the Option or any installment thereof be made later than ten (10) years from the original grant date. You may not exercise the Option with respect to less than fifty (50) shares at any one time except when the number of remaining shares of the Option is less than fifty (50); and except as is otherwise provided herein you may not exercise the Option or any installment thereof unless you are then an employee of the Company or one of its subsidiaries.

    2.
    Method of Exercising Option. You may exercise the vested option before the grant expiration date by stating the number of shares (but not fewer than fifty (50) shares or the remaining shares under the Option, if fewer) which the exercise is intended to cover and paying in full for the aggregate grant price for such shares, in cash, or by certified or bank check. In lieu of a cash payment in full, you may pay the grant price through the delivery (including by attestation of ownership) of a whole number of shares of Common Stock of the Company held for at least six months with a fair market value equal to the grant price less any cash included in the tender. Payment for any shares subject to an Option may also be made by delivering a properly executed notice to the Company, together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the aggregate grant price, and, if required, the amount of any federal, state, local or foreign withholding taxes. Certificates for shares that you purchased shall be promptly delivered per your instructions to you or your broker.

    3.
    ISO Tax Treatment. No ordinary taxable income is realized by the optionee upon the grant or exercise of an ISO. If no disposition of shares issued to an optionee pursuant to the exercise of an ISO is made by the optionee within two years from the date of grant or within one year after exercise, then upon a later sale of such shares, any gain or loss recognized in the sale will be taxed to the optionee as a long-term capital gain or loss. If shares of Common Stock acquired upon the exercise of an ISO are disposed of by the optionee prior to the expiration of the two-year or one-year holding periods (a "disqualifying disposition"), generally the optionee will realize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of the shares at exercise (or, if less, the amount realized on a sale of such shares) over the option price thereof. Any further gain recognized will be taxed as short-term or long-term capital gain. Exercise of an ISO increases the optionee's alternative minimum taxable income ("AMTI") by an amount equal, in general, to the excess of the fair market value of the shares acquired under the option over the option price. This increase may result in an alternative minimum tax ("AMT") liability to the optionee.

    4.
    Employee Rights and Duties. You shall not have any right of a stockholder with respect to the shares covered by the Option prior to the issuance thereof nor shall this agreement grant you any rights of employment with the Company.

    5.
    Non-Transferability. The Option shall not be transferable otherwise than by will or the laws of descent and distribution and it may be exercised only by you during your lifetime. Any attempt to assign or transfer the Option, either voluntarily or involuntarily, contrary to the provisions hereof, shall be null and void and without effect and shall render the Option itself null and void.

    6.
    Termination of Employment.

    a)
    Generally, an ISO will not be eligible for the tax treatment described above if it is exercised more than three months following termination of employment (one year following termination of employment, in the case of termination by reason of permanent and total disability), except in certain cases where the ISO is exercised after the death of the optionee. If an ISO is exercised at a time when it no longer qualifies for the tax treatment described above, the option is treated as a nonqualified option.

    b)
    If your employment terminates by reason of disability (as set forth in Section 7.1 for the Plan) or retirement at or after the normal or early retirement age under any retirement plan or supplemental retirement agreement maintained by the Company or any subsidiary prior to exercise, expiration, surrender or cancellation of the Option, the Option shall remain exercisable after the date of such termination of employment in accordance with the Plan and this agreement whether or not such Option was exercisable at the time of such termination during the period that ends on the later of (i) one (1) year after the Option first becomes exercisable or if exercisable in installments after the last installment becomes exercisable; and (ii) one (1) year from termination of employment.

    c)
    If your employment terminates by reason of death, whether or not then exercisable, all Options held by you prior to termination may be exercised by your executor or administrator or the person(s) to whom the Option is transferred by law or the applicable laws of descent and distribution during the period that ends one year after the date of death. In no event, however, shall an Option remain exercisable beyond the grant expiration date.

    d)
    If your employment terminates for any reason other than death, disability or retirement prior to exercise, expiration, surrender or cancellation of the Option, such Option shall terminate three (3) months from the date of such termination, during which period the Option may be exercised only to the extent that it was exercisable on the date of such termination. In the event that the award recipient is eligible to receive severance when terminated from the Company, the Option shall continue to vest through the end of the "bridging period" as defined in the Company's severance policy; under such circumstances, the Option shall terminate three (3) months from the date the bridging period ends. If you die within such three (3) month period, the Option shall expire (1) year after the date of your termination, during which period the Option may be exercised at any time by the person or persons to whom your rights shall pass by will or by the applicable laws of descent or distribution, but only to the extent it was exercisable on the date of such termination. In no event, however, may the Option be exercised after the grant expiration date set out in the applicable Certificate.

    e)
    Your rights with respect to any unexercised Option after termination of your employment other than by reason of death shall be subject to the conditions that until any such Option is exercised you shall (i) not engage either directly or indirectly, in any manner or capacity as advisor, principal, agent, partner, officer, director, employee, member of any association, or otherwise, in any business or activity which is at the time competitive with any business or activity conducted by the Company or any of its direct or indirect subsidiaries, and (ii) be available at reasonable times for consultations at the request of the Company's management with respect to phases of the business with which you were actively connected during your

        employment. In the event that either of the above conditions is not fulfilled, you shall forfeit all rights to any unexercised Option. Any determination by the Board of Directors that you are, or have, engaged in a competitive business or activity as aforesaid or have not been available for consultations as aforesaid shall be conclusive. Notwithstanding the foregoing this paragraph shall be inapplicable following a Change of Control (as defined in the Plan).

    7.
    Acceleration of Options. Upon a Change of Control (as defined in the Plan), all Options outstanding as of the date of such Change of Control is determined to have occurred and which are not then exercisable shall become fully exercisable. Optionees subject to Section 16 shall have certain rights to receive cash in lieu of exercising the option in the amount of the Spread, all as set forth in the Plan; provided, that for purposes of this Option, "Spread" shall mean, with respect to any share subject to the Option, the excess of fair market value of such share on the date of exercise over the per-share grant price. After a Change of Control (but subject to Section 7.3 of the Plan), the Option shall remain exercisable following a termination of your employment other than by reason of your death, disability or retirement for a period of seven (7) months after termination of employment, or until expiration of the original term of the Option, whichever period is shorter.

    8.
    Changes in Capitalization. The Board of Directors of the Company may make appropriate adjustments in the aggregate number and kind of shares and the grant price per share subject to the Option when it deems such action necessary by reason of any stock dividend, split or any recapitalization, reclassification, merger, consolidation, combination or similar transaction.

    9.
    Withholding. The Committee will have the right to require that you remit to the Company an amount sufficient to satisfy any withholding tax requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Committee may permit you to elect at such time and in such manner as the Committee provides to satisfy your withholding tax requirement with the proceeds from the sale of shares resulting from your option exercise. If at any time an ISO is exercised, the Committee determines that the Company could be liable for withholding requirements with respect to a disposition of the Common Stock received upon exercise, the Committee may require as a condition of exercise that the person exercising the ISO agree (i) to inform the Company promptly of any disposition (within the meaning of Section 424(c) of the Code) of Common Stock received upon exercise, and (ii) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security.

    10.
    Securities Act Considerations. The shares of Common Stock acquired by you upon exercise of the Option are registered under the Securities Act of 1933, as amended (the "Act"). Under current regulations, you may freely resell all or a part of such shares from time to time, provided you are not deemed to be an "affiliate" of the Company as that term is defined in the Act. Officers filing Forms 4—Statement of Changes in Beneficial Ownership are deemed to be affiliates. As an affiliate of the Company, you may resell such shares only pursuant to a currently effective registration statement on Form S-3 or Form S-1 as promulgated by the Securities and Exchange Commission, or pursuant to Rule 144 or other exemption under the Act.

By your accepting this agreement, this agreement shall take effect as a sealed instrument.




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Incentive Stock Option Award Agreement
EX-10.5 6 a2145272zex-10_5.htm EXHIBIT 10.5
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Exhibit 10.5

STATE STREET CORPORATION
1997 EQUITY INCENTIVE PLAN


Restricted Stock Award Agreement

Subject to your acceptance of the terms set forth in this agreement, State Street Corporation (the "Company") has awarded to you "restricted" shares of common stock ("Stock") of the Company, detailed in your award Certificate on this website and pursuant to the State Street Corporation 1997 Equity Incentive Plan (the "Plan") and certain conditions set forth below (the "Restricted Stock Award Agreement"). A copy of the Plan document and the Company's Prospectus are located on this website for your reference. All terms used herein shall have the same meaning as in the Plan, except as otherwise expressly provided. The term "vest" as used herein means the lapsing of the restrictions described herein and in the Plan with respect to one or more shares of Stock.

In consideration of the Company's accepting this Restricted Stock Award Agreement and transferring to you, the award recipient, the shares of Stock provided for herein and in the accompanying award Certificate, you hereby agree with the Company as follows:

1.
If certificates for the shares awarded hereunder are issued, the certificates for any unvested shares shall be held by the Company with blank stock powers to be used in the event of forfeiture. If unvested shares are held in book entry form, the Company may give stop transfer instructions to the depository to ensure compliance with the provisions hereof.

2.
The shares of Stock acquired by you hereunder pursuant to this Restricted Stock Award Agreement shall not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of except as provided below and in the Plan, which is incorporated herein by reference with the same effect as if set forth herein in full.

3.
In the event you cease to be employed by the Company and its subsidiaries for any reason, including retirement, other than death or disability (as hereinafter defined), the Stock acquired hereunder, less any shares that have previously vested, shall be immediately forfeited to the Company. You hereby (i) acknowledge that the shares of stock issued to you under the Restricted Stock Award Agreement may be held in book entry form on the books of Equiserve Trust Company, N.A. (or another institution specified by the Company), and irrevocably authorize the Company to take such actions as may be necessary or appropriate to effectuate a transfer of the record ownership of any such shares that are unvested and forfeited hereunder, (ii) agree to deliver to the Company, as a precondition to the issuance of any stock certificate or certificates with respect to unvested shares of Stock hereunder, one or more stock powers, endorsed in blank, with respect to such shares, and (iii) agree to sign such other powers and take such other actions as the Company may reasonably request to accomplish the transfer or forfeiture hereunder. For purposes of this Agreement, "disability" shall have the meaning set forth in Section 7.1 of the Plan.

4.
The shares acquired hereunder shall vest in accordance with the provisions of this Paragraph 4 and applicable provisions of the Plan, as specified on your award Certificate provided in each case that you are then, and since the grant date have continuously been, employed by the Company or its subsidiaries. In the event that you are eligible to receive severance when terminated from the Company, the unvested shares of Stock shall continue to vest through the end of the "bridging period" as defined in the Company's severance policy. In the event of a Change of Control of the Company, as defined in Section 7.4 of the Plan, all shares acquired hereunder that have not previously been forfeited shall immediately vest, provided that you are then employed by the Company or its subsidiaries.

5.
Any stock certificates representing unvested shares shall be held by the Company, and any such certificate (and to the extent determined by the Company, any other evidence of ownership of unvested shares) shall contain the following legend:

      THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE STATE STREET CORPORATION 1997 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND STATE STREET CORPORATION. COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF STATE STREET CORPORATION.

6.
As soon as practicable following the vesting of any such shares the Company shall cause a stock certificate or certificates covering such shares, without the aforesaid legend, to be issued and delivered to the award recipient, subject to the payment by the award recipient by cash or other means acceptable to the Company of any withholding taxes due in connection with such vesting.

7.
You shall be entitled to any and all dividends or other distributions paid with respect to all shares of Stock acquired hereunder which have not been forfeited or otherwise disposed of and shall be entitled to vote any such shares; provided, however, that any property (other than cash) distributed with respect to a share of Stock (the "associated share") acquired hereunder, including without limitation a distribution of Stock by reason of a stock dividend, stock split or otherwise, or a distribution of other securities with respect to an associated share, shall be subject to the restrictions of this Restricted Stock Award Agreement in the same manner and for so long as the associated share remains subject to such restrictions, and shall be promptly forfeited to the Company if and when the associated share is so forfeited.

8.
You understand that once a certificate has been delivered to you in respect of shares of Stock acquired hereunder which have vested, you will be free to sell the shares of Stock evidenced by such certificate, subject to applicable requirements of federal and state securities laws.

9.
You expressly acknowledge that the vesting of the shares of Stock acquired hereunder will give rise to ordinary income, subject to tax withholding. The amount of income realized will be the fair market value of the shares upon vesting when the substantial risk of forfeiture lapses. You expressly acknowledge and agree that your rights hereunder are subject to your paying to the Company in cash, or by selling shares of Stock acquired hereunder, or by the delivery of previously acquired Stock, all taxes required to be withheld in connection with such vesting.

10.
You also acknowledge that you may elect, within 30 days of the date of grant, under Section 83(b) of the IRS Code, to recognize income at the time of the award. If you make an 83(b) election, you must pay tax withholding based on the fair market value of the shares on the date of grant. If these shares are subsequently forfeited, the taxes paid are forfeited, and you may not claim a loss with respect to the income recognized or on the shares forfeited.

By your accepting this agreement, this agreement shall take effect as a sealed instrument.




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Restricted Stock Award Agreement
EX-10.6 7 a2145272zex-10_6.htm EXHIBIT 10.6
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Exhibit 10.6

STATE STREET CORPORATION
1997 EQUITY INCENTIVE PLAN


Deferred Stock Award Agreement

Subject to your acceptance of the terms set forth in this agreement, State Street Corporation (the "Company") has awarded you a right to shares of Deferred Stock (the "Deferred Shares") detailed in your Certificate on this website and pursuant to the State Street Corporation 1997 Equity Incentive Plan (the "Plan") and the terms set forth below (the "Deferred Stock Award Agreement"). A copy of the Plan document and the Company's Prospectus are located on this website for your reference. All terms used herein shall have the same meaning as in the Plan, except as otherwise expressly provided. The term "vest" as used herein means the lapsing of the restrictions described herein and in the Plan with respect to one or more shares of Stock. The terms of the Deferred Stock Award Agreement are as follows:

1.
Under the Deferred Stock Award Agreement and subject to the terms hereof, you will be granted a right to receive shares of common stock in the Company ("Stock").

2.
The shares of stock will be issued and transferred to you only if and when all requirements of this Deferred Stock Award Agreement have been satisfied. Prior to that time you will have no rights as a shareholder with respect to the Deferred Shares. Without limiting the foregoing, you will have no right to receive dividends or amounts in lieu of dividends with respect to the Deferred Shares and no right to vote the Deferred Shares. The Company's obligation to issue and transfer Stock in the future pursuant to the Deferred Stock Award Agreement is an unsecured and unfunded contractual obligation. Except to the extent expressly provided in the Plan and this agreement in the event of death, your rights and those of your beneficiary(ies) under this award are nontransferable.

3.
If you remain an employee of the Company and its subsidiaries until the vesting date(s) specified on your Certificate, the Company will issue and transfer to you, upon or as soon as practicable following such dates, the number of shares of Stock specified.

4.
In the event you cease to be employed by the Company and its subsidiaries for any reason, including retirement, other than death or disability (as hereinafter defined), you will immediately forfeit any and all rights to receive shares of Stock under this Deferred Stock Award Agreement, less any shares that have previously vested. In the event that you are eligible to receive severance when terminated from the Company, the unvested shares of Stock shall continue to vest through the end of the "bridging period" as defined in the Company's severance policy. Notwithstanding the foregoing, (i) if you die while employed by the Company and it subsidiaries, or if your employment with the Company and its subsidiaries terminates by reason of "disability" as that term is used in Section 7.1 of the Plan, or (ii) in the event of a Change of Control as defined in Section 7.4 of the Plan occurring while you are employed by the Company and its subsidiaries, the Company will promptly issue and deliver to you (or in the event of death, to your beneficiary designated in accordance with the terms of the Plan) any shares under the Deferred Stock Award Agreement that you had not otherwise received prior to such termination, death or Change of Control.

5.
You expressly acknowledge that the vesting of the shares of Stock acquired hereunder may give rise to ordinary income subject to withholding through your local payroll. You expressly acknowledge and agree that your rights hereunder are subject to your paying to the Company in cash, or by selling shares of Stock acquired hereunder, or by the delivery of previously acquired Stock, any applicable taxes required to be withheld in connection with such vesting.

6.
The Company shall be obligated to issue Stock pursuant to this agreement only if you first deliver to the Company funds sufficient to satisfy, or make other arrangements acceptable to the Company for satisfying, any tax withholding or similar withholding obligations to which the Company or its subsidiaries may be subject by reason of such transfer of this award.

7.
The number and kind of Deferred Shares subject to this award, and the number and kind of shares of stock to be delivered in satisfaction of the Company's obligations hereunder, shall be subject to adjustment in accordance with Section 8.6 of the Plan.

By your accepting this agreement, this agreement shall take effect as a sealed instrument.




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Deferred Stock Award Agreement
EX-10.7 8 a2145272zex-10_7.htm EXHIBIT 10.7

EXHIBIT 10.7

OFFER OF GRANT OF AWARD   STATE STREET CORPORATION
STATE STREET GLOBAL ADVISORS
One Lincoln Street
Boston, Massachusetts 02110

<DATE>

Re: SSgA Performance-Based Equity Award

Dear <Employee>:

As a member of a select group of key management of SSgA, you have been chosen to participate in SSgA's Performance-Based Equity Program. This letter shall serve as an agreement between you and State Street Corporation (the "Company") setting forth the terms and conditions relating to the Performance Award granted to you under the Company's 1997 Equity Incentive Plan, as amended (the "Plan"), if certain performance targets are met during designated performance periods.

1.     Grant of Performance Award.

        You have been granted a Performance Award ("Award") consisting of            units entitling you to payment as described below upon satisfaction of the terms and conditions of the plan. The Award has been granted with respect to the performance period (the "Performance Period") commencing January 1, 2004 and ending on December 31, 2006 (the "Maturity Date").

2.     Performance Targets: Committee Certification.

        Your Award shall be earned as follows:

The Performance Awards granted shall be earned based upon SSgA's compounded annual growth in Net Income Before Taxes (NIBT) during 2004, 2005, and 2006.

The specific NIBT targets were established by the Board of Directors ("Committee") on March 3, 2004 and are attached. Achievement of the specific performance target(s) will be a condition to the earning of any payment under this Award. The earning of the Award is also conditioned upon Committee certification, following the close of the Performance Period, that the specific performance targets have been achieved.

3.     Form of Payment.

    (A)
    Each Award is payable in stock, on or before March 31st following the end of the Performance Period, in an amount equal to the fair market value of one share of the Company's common stock, $1.00 par value (the "Common Stock") multiplied by the performance factor. For this purpose, fair market value shall mean the average of the closing high and low prices of the Common Stock on the ten trading days preceding the end of the Performance Period.

    (B)
    Upon your request made prior to January 1st of the year of the end of the Performance Period, payment under this Award may be deferred on such terms and for such period as the Committee may approve. The deferred amount will be credited to the Restoration & Voluntary Deferral Plan.

4.     Non—Transferability, Etc.

        The Award, including Performance Awards represented thereby, shall not be transferable otherwise than by will or the laws of descent and distribution.

5.     Termination of Employment

        Except as hereinafter expressly provided, no payment shall be made under an Award unless the Participant has been continuously employed by State Street Corporation and its subsidiaries ("State Street") from the date of the Award through the date of payment. Notwithstanding the foregoing:

In the case of a Participant whose employment with State Street terminates by reason of death, "disability" (as that term is defined in Section 7.1 of the Plan), or "retirement" (as that term is defined in Section 7.1 of the Plan) at any time during the Performance Period applicable to the award, shall vest and be paid a cash payment per Performance Award equal to the adjusted fair market value of a share of the Common Stock multiplied by the performance factor as of the date of termination for each performance period. For purposes of the preceding sentence, "adjusted fair market value" shall mean the higher of the highest average of the reported daily high and low prices per share of the Common Stock during the 60 day period prior to the termination date.

6.     Acceleration of Performance Award.

        Notwithstanding anything in this Agreement to the contrary, in the event of a Change of Control occurring prior to the Maturity Date, you shall be entitled at the time of such Change of Control to receive a cash payment per Performance Award equal to the adjusted fair market value of a share of the Common Stock. For purposes of the preceding sentence, "adjusted fair market value" shall mean the higher of the (i) the highest average of the reported daily high and low prices per share of the Common Stock during the 60 day period prior to the first date of actual knowledge by the Board of Directors of a Change of Control, and if the Change of Control is the result of a transaction or series of transactions described in Section 7.4(b)(1) or (3) of the Plan, the highest price per share of the Common Stock paid in such transaction series of transactions (which in the case of a transaction described in Section 7.4(b)(1) of the Plan shall be the highest price per share of the Common Stock as reflected in a Schedule 13D filed by the person having made the acquisition.

7.     Changes in Capitalization or Corporate Structure.

        The aggregate number of Performance Awards reflected in the Award shall be appropriately adjusted pursuant to Section 8.6 of the Plan to reflect transactions, events or circumstances described in said Section 8.6.

8.     Amendments to Performance Units.

        Subject to the specific limitations set forth in the Plan, the Committee may at any time suspend or terminate any rights or obligations relating to Performance Awards prior to their Maturity Date without your consent.

9.     Compliance with Section 162(m).

        The Committee shall exercise its discretion with respect to this award in all cases so as to preserve the deductibility of payments under the Award against disallowance by reason of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").



10.   No Hire/No Solicitation/Non-Compete Agreement.

        Each Award Agreement with a Participant under the Program shall incorporate by reference, and the Participant by signing such Award Agreement and accepting the Award shall be bound by, the following:

    (A)
    The Participant shall hold in a fiduciary capacity for the benefit of the Corporation all secret or confidential information, knowledge or data relating to SSgA, the Bank and the Corporation, or any of its subsidiaries and/or affiliates, and their respective businesses and Clients (as defined below), including but not limited to Clients' identities and any and all information regarding or relating to their business relationship with SSgA, the Bank and/or the Corporation, or any of its subsidiaries and/or affiliates, which shall have been obtained by the Participant during the Participant's employment by SSgA, the Bank and/or the Corporation, or any of its subsidiaries and/or affiliates and which shall not be or become public knowledge (other than by acts by the Participant or representatives of the Participant in violation hereof). After termination of the Participant's employment, for any reason, the Participant shall not, without the prior written consent of the Corporation or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Corporation and those designated by it. The term "Client(s)" means any person or entity that is a customer or client of SSgA, the Bank and/or the Corporation, or any of its subsidiaries and/or affiliates.

    (B)
    During the term of employment of the Participant and during the Non-solicitation Period (as defined below), the Participant shall not, without the prior written consent of the Corporation, (i)(a) solicit, directly or indirectly (other than through a general solicitation of employment not specifically directed to employees of the Corporation or its subsidiaries and/or affiliates), the employment of; (b) hire or employ; (c) recruit; or (d) in any way assist another in soliciting or recruiting the employment of, or (ii) induce the termination of the employment of, any person who within the previous 12 months was an officer or principal of the Corporation or any of its subsidiaries and/or affiliates. The term "Non-solicitation Period" means the period beginning on the date of termination of the Participant's employment with the Corporation or its subsidiaries and/or affiliates (the "Termination Date") and ending eighteen (18) months after the Termination Date.

    (C)
    During the term of employment of the Participant and during the Non-solicitation Period, the Participant shall not, without the prior written consent of the Corporation, engage in the Solicitation of Business (as defined below) from any Client on behalf of any person or entity other than the Corporation and its subsidiaries and/or affiliates. The term "Solicitation of Business" means the attempt through direct or indirect contact by the Participant or by any other person or entity with the Participant's assistance with a Client with whom the Participant has had or with whom persons supervised by the Participant have had significant personal contact while employed by the Corporation or its subsidiaries or its affiliates to induce such Client to (i) transfer its business from the Corporation and/or its subsidiaries and/or affiliates to any other person or entity; (ii) cease or curtail its business with the Corporation and/or its subsidiaries and/or affiliates; or (iii) divert a business opportunity from the Corporation and/or its subsidiaries and/or affiliates to any other person or entity.

    (D)
    For and during a period of eighteen (18) months following termination of employment for any reason, the Participant shall not engage, either directly or indirectly, in any manner or capacity as advisor, principal, agent, partner, officer, director or employee of, or as consultant to, any of the Top Five (5) (as defined below) institutions, or their subsidiaries.

The Top Five (5) institutions shall mean the five institutions with the highest value of total assets under management as listed in Institutional Investor's annual ranking of America's Top Money Managers, Total Assets Under Management (historically published in the month of July) or Pensions & Investments' annual ranking of Top Firms Ranked By Worldwide Assets (historically published in the month of May) (each such institution, its subsidiaries and/or affiliates being referred to as "Institution(s)") published most recently prior to the Termination Date (the "Publication Date"); provided, that if one or both of these publications change the title of their rankings, the ranking(s) utilized will be ranking(s) of total assets



under management; and provided further, that if one or both of these publications change their names, or cease to carry out the described annual rankings, the ranking(s) utilized will be by the publication(s) that are recognized in the worldwide investment community as the most trustworthy rankings, as determined by the Committee. If for any reason the publications used to determine the Top Five (5) institutions have different rankings, then any Institution listed in the Top Five (5) list of any such publication will be considered an Institution in the Top Five (5). For purposes of this Agreement, the Top Five (5) institutions shall be determined without regard to, and shall not include, the Corporation or its subsidiaries, affiliates and divisions.

For purposes of this paragraph V(a)4., any successor entity to an Institution, by way of merger, acquisition (either of stock or substantially all of the assets), reorganization, change of name or other similar event occurring subsequent to the Publication Date, shall be treated as the Institution.

    (E)
    In the event of a breach by the Participant of any of the foregoing, (a) the Participant shall forfeit all rights to any and all Awards then held by the Participant, and (b) the Corporation may seek injunctive relief in addition to, and not in lieu of, any other relief to which it may be entitled, including the relief described at (a) immediately above.

    (F)
    Upon and following the occurrence (as determined by the Committee) of a "covered transaction" as defined in IV(c)2., the non-solicitation and non-competition restrictions described in paragraphs 2., 3., and 4. above shall cease to apply.

11.   Provisions of the Plan.

        The provisions of the Plan are incorporated herein by reference, and all terms not other wise defined herein shall have the meaning given to them in the Plan. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan shall control. You acknowledge that you have received a copy of the Plan.

If the Award and the foregoing terms and conditions are acceptable to you, please sign the enclosed counterpart of this letter and return the same to the undersigned.

    Very Truly Yours,

 

 

STATE STREET CORPORATION

 

 

By:


John F. Marrs Jr.

The undersigned hereby accepts the Award and the Performance Awards represented thereby on the terms and subject to the conditions set forth above.

     

Dated:


 

 

 


EX-12 9 a2145272zex-12.htm EX-12
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EXHIBIT 12

STATE STREET CORPORATION

Ratio of Earnings to Fixed Charges

 
  Nine Months
Ended
September 30,
2004

  Years Ended December 31,
(Dollars in millions)

  2003
  2002
  2001
  2000
  1999
(A) Excluding interest on deposits:                                    
Earnings:                                    
Income before income taxes   $ 936   $ 1,123   $ 1,554   $ 944   $ 914   $ 974
Fixed charges     280     375     506     983     1,360     954
   
 
 
 
 
 
Earnings as adjusted   $ 1,216   $ 1,498   $ 2,060   $ 1,927   $ 2,274   $ 1,928
   
 
 
 
 
 
Income before income taxes:                                    
Pre-tax income from continuing operations as reported   $ 913   $ 1,112   $ 1,555   $ 930   $ 906   $ 968
Share of pre-tax income (loss) of 50% owned subsidiaries not included in above     23     11     (1 )   14     8     6
   
 
 
 
 
 
Net income as adjusted   $ 936   $ 1,123   $ 1,554   $ 944   $ 914   $ 974
   
 
 
 
 
 
Fixed charges:                                    
Interest on other borrowings   $ 202   $ 279   $ 426   $ 881   $ 1,268   $ 874
Interest on long-term debt, including amortization of debt issue costs     72     78     71     93     82     70
Portion of rents representative of the interest factor in long-term leases     6     18     9     9     10     10
   
 
 
 
 
 
Fixed charges   $ 280   $ 375   $ 506   $ 983   $ 1,360   $ 954
   
 
 
 
 
 
Ratio of earnings to fixed charges     4.34x     4.00x     4.07x     1.96x     1.67x     2.02x
   
 
 
 
 
 
(B) Including interest on deposits:                                    
Adjusted earnings from (A) above   $ 1,216   $ 1,498   $ 2,060   $ 1,927   $ 2,274   $ 1,928
Add interest on deposits     339     372     498     856     1,012     712
   
 
 
 
 
 
Earnings as adjusted   $ 1,555   $ 1,870   $ 2,558   $ 2,783   $ 3,286   $ 2,640
   
 
 
 
 
 
Fixed charges:                                    
Fixed charges from (A) above   $ 280   $ 375   $ 506   $ 983   $ 1,360   $ 954
Interest on deposits     339     372     498     856     1,012     712
   
 
 
 
 
 
Adjusted fixed charges   $ 619   $ 747   $ 1,004   $ 1,839   $ 2,372   $ 1,666
   
 
 
 
 
 
Adjusted earnings to adjusted fixed charges     2.51x     2.50x     2.55x     1.51x     1.39x     1.58x
   
 
 
 
 
 



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EX-15 10 a2145272zex-15.htm EX-15
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EXHIBIT 15

STATE STREET CORPORATION

Independent Registered Public Accounting Firm's Acknowledgement Letter

The Stockholders and Board of Directors
State Street Corporation

We are aware of the incorporation by reference in Registration Statements (Form S-3: Nos. 333-98267, 333-16987, 333-34516, 333-34516-01, 333-34516-02, 333-34516-03, 333-2143, 33-49885, 333-49143, 333-49143-01, 333-49143-02, 333-49143-03 and 333-53854 and Form S-8: Nos. 333-100001, 333-99989, 333-65281, 333-46678, 333-36409, 333-16979, 33-57359, 33-38672, 33-38671, 33-2882, 2-93157, 2-88641, 2-68696 and 2-68698), of our reports dated April 12, 2004, July 12, 2004, and October 11, 2004, relating to the unaudited condensed consolidated interim financial statements of State Street Corporation which are included in its Form 10-Q for the quarters ended March 31, 2004, June 30, 2004, and September 30, 2004.

Ernst & Young LLP

Boston, Massachusetts
November 5, 2004




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EX-31.1 11 a2145272zex-31_1.htm EX-31.1
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EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Ronald E. Logue, certify that:

I have reviewed this quarterly report on Form 10-Q of State Street Corporation;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

            (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

            (b)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

            (c)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

            (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

            (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 5, 2004

    By: /s/  RONALD E. LOGUE      
Ronald E. Logue,
Chairman and Chief Executive Officer



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EX-31.2 12 a2145272zex-31_2.htm EX-31.2
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EXHIBIT 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Edward J. Resch, certify that:

I have reviewed this quarterly report on Form 10-Q of State Street Corporation;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

            (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

            (b)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

            (c)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

            (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

            (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 5, 2004

    By: /s/  EDWARD J. RESCH      
Edward J. Resch,
Executive Vice President and Chief Financial Officer



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EX-32 13 a2145272zex-32.htm EX-32
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EXHIBIT 32

SECTION 1350 CERTIFICATIONS

To my knowledge, this Report on Form 10-Q for the period ended September 30, 2004, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of State Street Corporation.

Date: November 5, 2004   By: /s/  RONALD E. LOGUE      
Ronald E. Logue,
Chairman and Chief Executive Officer
Date: November 5, 2004   By: /s/  EDWARD J. RESCH      
Edward J. Resch,
Executive Vice President and Chief Financial Officer



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