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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-5108
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STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2456637
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
225 FRANKLIN STREET 02110
BOSTON, MASSACHUSETTS (Zip Code)
(Address of principal executive office)
617-786-3000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
------------------------------------------------ ------------------------------------------------
Common Stock, $1 par value Boston Stock Exchange
Preferred share purchase rights New York Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the Registrant's Common Stock held by
non-affiliates (persons other than directors and executive officers) of the
registrant on January 31, 2001 was $18,166,012,516.
The number of shares of the Registrant's Common Stock outstanding on January
31, 2001 was 161,803,146.
Portions of the following document are incorporated into the Parts of this
Report on Form 10-K indicated below: (1) The Registrant's definitive Proxy
Statement for the 2001 Annual Meeting to be filed pursuant to Regulation 14A on
or before April 30, 2001 (Part III).
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STATE STREET CORPORATION
FORM 10-K INDEX
FOR THE YEAR ENDED DECEMBER 31, 2000
PAGE
NUMBER
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PART I
Item 1 Business.................................................... 1-14
Item 2 Properties.................................................. 14
Item 3 Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 14
Item 4A Executive Officers of the Registrant........................ 15
PART II
Market for Registrant's Common Equity and Related
Item 5 Stockholder Matters......................................... 16
Item 6 Selected Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition
Item 7 and Results of Operations................................... 16
Quantitative and Qualitative Disclosures about Market
Item 7A Risk........................................................ 16
Item 8 Financial Statements and Supplementary Data................. 16
Changes in and Disagreements with Accountants on Accounting
Item 9 and Financial Disclosure.................................... 16
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 17
Item 11 Executive Compensation...................................... 17
Security Ownership of Certain Beneficial Owners and
Item 12 Management.................................................. 17
Item 13 Certain Relationships and Related Transactions.............. 17
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14 8-K......................................................... 18-22
Signatures........................................................... 23
Exhibits
PART I
ITEM 1. BUSINESS
The business of State Street Corporation and its subsidiaries is further
described in Part I, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
GENERAL DEVELOPMENT OF BUSINESS
State Street Corporation ("State Street" or the "Corporation") is a
financial holding company organized under the laws of the Commonwealth of
Massachusetts. State Street provides a full range of products and services for
sophisticated global investors.
State Street was organized in 1970 and conducts its business principally
through its subsidiary, State Street Bank and Trust Company ("State Street Bank"
or the "Bank"), and traces its beginnings to the founding of the Union Bank in
1792. The charter under which State Street Bank now operates was authorized by a
special act of the Massachusetts Legislature in 1891, and its present name was
adopted in 1960.
With $6.1 trillion of assets under custody and $711 billion of assets under
management at year-end 2000, State Street is a leading specialist in meeting the
needs of sophisticated global investors. Clients include mutual funds and other
collective investment funds, corporate and public pension funds, investment
managers, and others. For information as to non-U.S. activities, refer to Note W
that appears in the Notes to Financial Statements in Part I, Item 8, "Financial
Statements and Supplementary Data."
Services are provided from 31 offices in the United States, and from offices
in Australia, Belgium, Canada, Cayman Islands, Chile, Czech Republic, France,
Germany, Ireland, Japan, Luxembourg, Netherlands, Netherlands Antilles, New
Zealand, People's Republic of China, Russia, Singapore, South Korea,
Switzerland, Taiwan, United Arab Emirates and the United Kingdom. State Street's
executive offices are located at 225 Franklin Street, Boston, Massachusetts.
LINES OF BUSINESS
State Street reports two lines of business: Investment Services and
Investment Management. Historical operating results for the commercial banking
business, sold in 1999, are discussed separately under the heading "Business
Divestiture." In 2000, revenue from Investment Services comprised 79% of State
Street's total revenue. Revenue from Investment Management comprised the
remaining 21%. For additional information on State Street's lines of business,
see Part I, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" under the caption "Lines of Business."
INVESTMENT SERVICES
Investment Services includes accounting, administration, custody, daily
pricing, operations outsourcing for investment managers, securities lending,
foreign exchange, recordkeeping, deposit and short-term investment facilities,
lease financing, and information services. These services support sophisticated
investors in developing and executing their strategies, enhancing their returns,
and evaluating and managing risk. Clients around the world include mutual funds
and other collective investment funds, corporate and public pension plans,
corporations, investment managers, not-for-profit organizations, unions, and
other holders of investment assets. During 2000, State Street began providing an
expanding array of operational outsourcing services to investment management
clients. This enables State Street to provide global asset managers with a
comprehensive suite of services, from trade order management through settlement.
With $2.7 trillion of mutual fund assets under custody, State Street is the
largest mutual fund custodian and accounting agent in the United States. State
Street began providing mutual fund services in 1924. State Street provides
custody services for 42% of registered U.S. mutual funds, and is distinct from
other mutual fund service providers because clients make extensive use of a
number of related services, including accounting, daily pricing and fund
administration. The Corporation provides fund accounting and valuation services
for more than four times the assets serviced by the next largest accounting
service provider. State Street calculates 27% of the U.S. mutual fund prices
that appear daily in the WALL STREET JOURNAL. Services such as fund accounting
and administration, accounting for multiple classes of shares and master/feeder
funds, and accounting for offshore funds and local funds in locations outside
the United States contribute to Investment Services fee revenue. Shareholder
services are provided through 50%-owned affiliates, Boston Financial Data
Services, Inc. and European Financial Data Services Limited.
State Street is committed to expanding globally by serving the worldwide
needs of both its U.S. and non-U.S. domiciled clients. State Street provides
global and U.S. custody and custody-related services for $651 billion in assets
for clients outside the United States.
1
State Street began servicing pension assets in 1974, and at December 31,
2000, had $2.8 trillion of pension, insurance and other investment pool assets
under custody for U.S. clients. State Street provides trusteeship, custody,
portfolio accounting, securities lending, information and other related services
for retirement plans and other financial asset portfolios of corporations,
public funds, investment managers, not-for-profit organizations, unions and
others in the U.S. Services provided include performance and analytics, global
reporting, compliance monitoring and other services that institutional clients
require to meet their changing needs. Institutional clients make extensive use
of many State Street products and services, including brokerage, foreign
exchange, and investment management. State Street has a leading share of the
market for servicing U.S. tax-exempt assets for corporate and public funds. Over
the past five years, State Street's market share has grown from 22% to 26%.
Additionally, State Street provides trust and valuation services for over 3,800
daily-priced, unitized defined contribution accounts, making State Street a
market leader.
State Street provides foreign exchange services to sophisticated global
investors. These services include currency trading and research, risk management
and electronic execution services. State Street is a securities lending agent
providing collateral management and lending of securities issued in 28
countries, acting as agent between institutional investors and broker/dealers
worldwide. State Street also provides repurchase agreements and deposit services
for the short-term cash needs associated with clients' investment activities.
Trading and arbitrage operations are conducted with government securities and
other financial instruments.
INVESTMENT MANAGEMENT
State Street provides an extensive range of investment management
strategies, securities lending, specialized investment management advisory
services and investment management and other financial services for
corporations, public funds, high-net-worth individuals and other sophisticated
investors. These services are offered through State Street Global
Advisors-Registered Trademark- (SSgA-Registered Trademark-). SSgA is the sixth
largest asset manager in the world and the largest manager of tax-exempt
(primarily pension) assets in the United States. SSgA offers a broad array of
investment strategies, including passive, enhanced and active management using
quantitative and fundamental methods for both domestic and global equities and
fixed income securities. Fees are based on the investment strategy, the amount
of the investment and the client's total State Street relationship. During 2000,
State Street continued to develop new products and distribution channels. State
Street, which in 1993 helped develop exchange-traded funds with the American
Stock Exchange, provides investment and trust services to approximately half of
the exchange-traded fund assets worldwide. SSgA is a leading trustee and money
manager for individuals. At year-end 2000, institutional and personal trust
assets under management totaled $711 billion.
SSgA has offices worldwide, including Boston and other cities throughout the
United States, Brussels, Dubai, Hong Kong, London, Montpellier, Montreal,
Moscow, Munich, Paris, Prague, Santiago, Seoul, Singapore, Sydney, Tokyo,
Toronto and Zurich.
BUSINESS DIVESTITURE
Business Divestiture includes historical operating results for the
commercial banking business. On October 1, 1999, State Street sold this
business, which consisted of a $2.4 billion loan portfolio, a $36 million
allowance for loan losses and $1.1 billion in deposits. The historical revenue
and expenses of this business include allocations of other items in accordance
with existing methodologies for line of business presentation.
COMPETITION
State Street operates in a highly competitive environment in all areas of
its business on a worldwide basis. State Street faces competition from other
deposit-taking institutions, investment management firms, private trustees,
insurance companies, mutual funds, broker/dealers, investment banking firms, law
firms, benefits consultants, leasing companies, and business service and
software companies. As State Street expands globally, additional sources of
competition are encountered.
State Street believes there are certain key competitive considerations in
these markets, specifically, for investment services: quality of service,
efficiencies of scale, technological expertise, quality and scope of sales and
marketing, and price; and for investment management: expertise, experience, the
availability of related service offerings, and price.
State Street's competitive success depends upon its ability to develop and
market new and innovative services; to adopt or develop new technologies to
bring new services to market in a timely fashion at competitive prices; and to
continue and expand its relationships with existing and new clients.
2
EMPLOYEES
At December 31, 2000, State Street had 17,604 employees, of whom 17,022 were
full-time.
REGULATION AND SUPERVISION
GENERAL. State Street is registered with the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") as a bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "Act"). The
Act, with certain exceptions, limits the activities that may be engaged in by
State Street and its nonbank subsidiaries, which includes nonbank companies for
which State Street owns or controls more than 5% of a class of voting shares, to
those which are deemed by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
Federal Reserve Board may order a bank holding company to terminate any activity
or its ownership or control of a nonbank subsidiary if the Federal Reserve Board
finds that such activity or ownership or control constitutes a serious risk to
the financial safety, soundness or stability of a subsidiary bank and is
inconsistent with sound banking principles or statutory purposes. In the opinion
of management, all of State Street's present subsidiaries are within the
statutory standard or are otherwise permissible. The Act also requires a bank
holding company to obtain prior approval of the Federal Reserve Board before it
may acquire substantially all the assets of any bank or ownership or control of
more than 5% of the voting shares of any bank.
In 1999, major financial services modernization legislation, known as the
"Gramm-Leach-Bliley Act of 1999", ("GLBA"), became law. GLBA reduces to some
extent the restrictions on activities of certain bank holding companies, such as
State Street, which qualify as financial holding companies. GLBA also lifts the
Glass-Steagall Act prohibitions on banks associating with, or having management
interlocks with, business organizations engaged in securities activities. The
repeal of the Glass-Steagall Act and the availability of new powers both were
effective on or after March 12, 2000. State Street became a financial holding
company on March 13, 2000. By electing to become a financial holding company, a
bank holding company such as State Street, may acquire new powers not otherwise
available to it. In order to qualify, each bank holding company's depository
subsidiaries must be well capitalized and well managed, and must be meeting its
Community Reinvestment Act obligations. Once qualified as a financial holding
company, a bank holding company must continue to meet the applicable capital and
management standards. Failure to maintain such standards may ultimately permit
the Federal Reserve Board to take certain enforcement action against such
company.
Financial holding companies are permitted to engage in those activities that
are determined by the Federal Reserve Board, working with the Secretary of the
Treasury, to be financial in nature, incidental to an activity that is financial
in nature, or complementary to a financial activity and that does not pose a
safety and soundness risk. GLBA defines certain activities as financial in
nature, including, but not limited to, the following: providing financial or
investment advice; underwriting; dealing in or making markets in securities;
merchant banking, subject to significant limitations; and any activities
previously found by the Federal Reserve Board to be closely related to banking.
A company that is predominantly engaged in financial activities but is not a
bank holding company may, if it becomes a bank holding company and thereby also
a financial holding company, continue to engage in or retain a subsidiary
engaging in those nonfinancial activities in which the company or its subsidiary
was lawfully engaged on September 30, 1999, but it may not expand those
grandfathered activities or initiate new nonfinancial activities. Such
grandfathering is available for up to fifteen years from the date GLBA was
enacted.
GLBA also permits national and state banks (subject to capital, management,
size, debt rating, and Community Reinvestment Act qualification factors) to have
"financial subsidiaries" that are permitted to engage in financial activities
not otherwise permissible. However, unlike financial holding companies,
financial subsidiaries may not engage in insurance underwriting, developing or
investing in real estate, merchant banking (for at least five years from the
date GLBA was enacted) or insurance portfolio investing.
CAPITAL ADEQUACY. Bank holding companies, such as State Street, are subject
to Federal Reserve Board minimum risk-based capital and leverage ratio
guidelines. At December 31, 2000, State Street's consolidated Tier 1 capital and
total capital ratios were 14.5% and 15.6%, respectively. For further information
as to the Corporation's capital position and capital adequacy, refer to Part I,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the caption "Liquidity and Capital", and to Note K to the
Notes to Consolidated Financial Statements included in Part I, Item 8,
"Financial Statements and Supplementary Data."
State Street Bank is subject to similar risk-based and leverage capital
requirements. State Street Bank was in compliance with the applicable minimum
capital requirements as of December 31, 2000. Failure to meet capital
requirements could subject a bank to a variety of enforcement actions, including
the termination of deposit insurance by the Federal Deposit Insurance
Corporation (the "FDIC"), and to certain restrictions on its business, which are
described further in this section.
3
SUBSIDIARIES. The primary federal banking agency responsible for regulating
State Street and its subsidiaries, including State Street Bank, for both U.S.
and international operations is the Federal Reserve System. State Street is also
subject to the Massachusetts bank holding company statute. The Massachusetts
statute requires prior approval by the Massachusetts Board of Bank Incorporation
for the acquisition by State Street of more than 5% of the voting shares of any
additional bank and for other forms of bank acquisitions.
State Street's banking subsidiaries are subject to supervision and
examination by various regulatory authorities. State Street Bank is a member of
the Federal Reserve System and the FDIC and is subject to applicable federal and
state banking laws and to supervision and examination by the Federal Reserve
Bank of Boston, as well as by the Massachusetts Commissioner of Banks, the FDIC,
and the regulatory authorities of those countries in which a branch of State
Street Bank is located. Other subsidiary trust companies are subject to
supervision and examination by the Office of the Comptroller of the Currency,
other offices of the Federal Reserve System or by the appropriate state banking
regulatory authorities of the states in which they are located. State Street's
non-U.S. banking subsidiaries are subject to regulation by the regulatory
authorities of the countries in which they are located. The capital of each of
these banking subsidiaries is in excess of the minimum legal capital
requirements as set by those authorities.
State Street and its nonbank subsidiaries are affiliates of State Street
Bank under the federal banking laws, which impose certain restrictions on
transfers of funds in the form of loans, extensions of credit, investments or
asset purchases by State Street Bank to State Street and its nonbank
subsidiaries. Transfers of this kind to State Street and its nonbank
subsidiaries by State Street Bank are limited to 10% of State Street Bank's
capital and surplus with respect to each affiliate and to 20% in the aggregate,
and are subject to certain collateral requirements. A bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or lease or sale of property or
furnishing of services. Federal law also provides that certain transactions with
affiliates must be on terms and under circumstances, including credit standards
that are substantially the same, or at least as favorable to the institution as
those prevailing at the time for comparable transactions involving other
nonqualified companies or, in the absence of comparable transactions, on terms
and under circumstances, including credit standards, that in good faith would be
offered to, or would apply to, nonaffiliated companies. The Federal Reserve
Board has jurisdiction to regulate the terms of certain debt issues of bank
holding companies.
SUPPORT OF SUBSIDIARY BANKS. Under Federal Reserve Board policy, a bank
holding company is required to act as a source of financial and managerial
strength to its subsidiary banks. Under this policy, State Street is expected to
commit resources to its subsidiary banks in circumstances where it might not do
so absent such policy. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority payment.
DIVIDENDS
As a bank holding company, State Street is a legal entity separate and
distinct from State Street Bank and its nonbank subsidiaries. The right of State
Street to participate as a stockholder in any distribution of assets of State
Street Bank upon its liquidation or reorganization or otherwise is subject to
the prior claims by creditors of State Street Bank, including obligations for
federal funds purchased and securities sold under repurchase agreements and
deposit liabilities. Payment of dividends by State Street Bank is subject to
provisions of the Massachusetts banking law which provides that dividends may be
paid out of net profits provided (i) capital stock and surplus remain
unimpaired, (ii) dividend and retirement fund requirements of any preferred
stock have been met, (iii) surplus equals or exceeds capital stock, and
(iv) there are deducted from net profits any losses and bad debts, as defined,
in excess of reserves specifically established therefore. Under the Federal
Reserve Act, the approval of the Federal Reserve Board would be required if
dividends declared by the Bank in any year would exceed the total of its net
profits for that year combined with retained net profits for the preceding two
years, less any required transfers to surplus. Under applicable federal and
state law restrictions, at December 31, 2000, State Street Bank had $1.2 billion
of retained earnings available for distribution to State Street in the form of
dividends. Future dividend payments of the Bank and nonbank subsidiaries cannot
be determined at this time.
ECONOMIC CONDITIONS AND GOVERNMENT POLICIES
Economic policies of the government and its agencies influence the operating
environment of State Street. Monetary policy conducted by the Federal Reserve
Board directly affects the level of interest rates and overall credit conditions
of the economy. Policy is applied by the Federal Reserve Board through open
market operations in U.S. government securities, changes in reserve requirements
for depository institutions, and changes in the discount rate and availability
of borrowing from the Federal Reserve. Government regulations of banks and bank
holding companies are intended primarily for the protection of depositors of the
banks, rather than of the stockholders of the institutions.
4
FACTORS AFFECTING FUTURE RESULTS
From time to time, information provided by State Street, statements made by
its employees, or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K), may contain statements which are
not historic facts (so-called "forward looking statements"), including
statements about the Corporation's confidence and strategies and its expectation
about revenues and market growth, new technologies, services and opportunities,
and earnings. 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. These forward-looking statements
involve certain risks and uncertainties, including the issues and factors listed
below and factors further described in conjunction with the forward-looking
information, which could cause actual results to differ materially. Factors that
may cause such differences include, but are not limited to, the factors
discussed in this section and elsewhere in this Form 10-K. Each of these
factors, and others, are also discussed from time to time in the Corporation's
other filings with the Securities and Exchange Commission, including its reports
on Form 10-Q. The forward-looking statements contained in this Form 10-K speak
only as of the time the statements were given, and the Corporation does not
undertake to revise those forward-looking statements to reflect events after the
date of this report.
CROSS-BORDER INVESTING. Increases in cross-border investing by clients
worldwide benefit State Street's revenue. Future revenue may increase or
decrease depending upon the extent of increases or decreases in cross-border
investments made by clients or future clients.
SAVINGS RATE OF INDIVIDUALS. State Street benefits from the savings of
individuals that are invested in mutual funds and other collective funds or in
defined contribution plans. Changes in savings rates or investment styles may
affect revenue.
VALUE OF WORLDWIDE FINANCIAL MARKETS. As worldwide financial markets
increase or decrease in value, State Street's opportunities to invest and
service financial assets may change. Since a portion of the Corporation's fees
are based on the value of assets under custody and management, fluctuations in
worldwide securities market valuations will affect revenue.
DYNAMICS OF MARKETS SERVED. Changes in markets served, including the growth
rate of collective funds worldwide, the pace of debt issuance, outsourcing
decisions, and mergers, acquisitions and consolidations among clients and
competitors, can affect revenue. In general, State Street benefits from an
increase in the volume of financial market transactions serviced.
State Street provides services worldwide. Global and regional economic
factors and changes or potential changes in laws and regulations affecting the
Corporation's business, including volatile currencies, changes in monetary
policy, and social and political instability, could affect results of
operations.
INTEREST RATES. Market interest rate levels, the shape of the yield curve
and the direction of interest rate changes affect net interest revenue, as well
as securities lending revenue recorded in servicing and management fees. All
else being equal, in the short term, State Street's net interest revenue
benefits from falling interest rates and is negatively affected by rising rates
because interest-bearing liabilities reprice sooner than interest-earning
assets. In general, sustained lower interest rates have a constraining effect on
the net interest revenue growth rate.
VOLATILITY OF CURRENCY MARKETS. The degree of volatility in foreign
exchange rates can affect the amount of foreign exchange trading revenue. In
general, State Street benefits from currency volatility.
PACE OF PENSION REFORM. State Street expects to benefit from worldwide
pension reform that creates additional pools of assets that use custody and
related services and investment management services. The pace of pension reform
and resulting programs including public and private pension schemes may affect
the pace of revenue growth.
PRICING/COMPETITION. Future prices the Corporation is able to obtain for
its products may increase or decrease from current levels depending upon demand
for its products, its competitors' activities and the introduction of new
products into the marketplace.
PACE OF NEW BUSINESS. The pace at which existing and new clients use
additional services and assign additional assets to State Street for management
or custody will affect future results of operations.
BUSINESS MIX. Changes in business mix, including the mix of U.S. and
non-U.S. business may affect future results of operations.
5
RATE OF TECHNOLOGICAL CHANGE. Technological change creates opportunities
for product differentiation and reduced costs, as well as the possibility of
increased expenses. Developments in the securities processing industry,
including shortened settlement cycles and ultimately straight-through
processing, will result in changes to existing procedures. Alternative delivery
systems have emerged, including the widespread 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.
There are risks inherent in this process. These include rapid technological
change in the industry, the Corporation's ability to access technical and other
information from clients, and the significant and ongoing investments required
to bring new services to market in a timely fashion at competitive prices.
Further, there is risk that competitors may introduce services that could
replace or provide lower-cost alternatives to State Street's services.
State Street uses appropriate trademark, trade secret, copyright and other
proprietary rights procedures to protect its technology, and has applied for a
limited number of patents in connection with certain software programs. However,
in the event a third party asserts a claim of infringement of its proprietary
rights, obtained through patents or otherwise, against the Corporation, State
Street may be required to spend significant resources to defend against such
claims, develop a non-infringing program or process, or obtain a license to the
infringed process.
ACQUISITIONS AND ALLIANCES. Acquisitions of complementary businesses and
technologies, and development of strategic alliances are a part of State
Street's overall business strategy. The Corporation has completed several
acquisitions and alliances in recent years. However, there can be no assurance
that services, technologies, key personnel, and businesses of acquired companies
will be effectively assimilated into State Street's business or service
offerings or that alliances will be successful.
GRAMM-LEACH-BLILEY ACT OF 1999. The Gramm-Leach-Bliley Act of 1999, enacted
by the U.S. Congress, may cause changes in the competitive environment in which
State Street operates. Such changes could include, among other things,
broadening the scope of activities of significant competitors, or facilitating
consolidation of competitors into larger, better-capitalized companies, offering
a wide array of financial services and products; and attracting large and well-
capitalized financial services companies into activities not previously
undertaken but competitive to the Corporation's traditional businesses. In
addition, the Corporation's ability to engage in new activities may expose it to
business risks with which it has less experience than it has with the business
risks associated with its traditional businesses. Such changes and the ability
of the Corporation to address and adapt to the regulatory and competitive
challenges, may affect future results of operations.
SELECTED STATISTICAL INFORMATION
The following tables contain State Street's consolidated statistical
information relating to, and should be read in conjunction with the financial
information provided in Part I, Item 8, "Financial Statements and Supplementary
Data"; Part I, Item 6, "Selected Financial Data"; and Part I, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
The average statements of condition and net interest revenue analysis for
the years indicated are presented below.
2000 1999(1) 1998
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS; TAXABLE EQUIVALENT)
ASSETS
Interest-bearing deposits with
banks (2).................... $16,399 $ 743 4.53% $13,043 $ 497 3.81% $11,271 $ 537 4.76%
Securities purchased under
resale agreements and
securities borrowed.......... 18,531 1,159 6.26 15,663 786 5.02 12,876 691 5.37
Federal funds sold............. 1,186 75 6.30 652 32 4.95 762 42 5.46
Trading account assets......... 1,083 54 4.99 645 24 3.68 268 10 3.61
Investment securities:
U.S. Treasury and federal
agencies................... 8,308 520 6.26 7,230 399 5.51 5,337 313 5.88
State and political
subdivisions............... 1,932 133 6.91 1,691 102 6.05 1,729 105 6.08
Other investments.......... 4,954 324 6.54 3,780 222 5.89 2,816 170 6.03
Loans(3):
U.S........................ 3,318 175 5.28 4,650 271 5.83 4,549 271 5.97
Non-U.S.................... 2,126 138 6.48 2,135 144 6.73 1,798 138 7.67
------- ------- ------- ------ ------- ------
Total Interest-Earning
Assets................. 57,837 3,321 5.74 49,489 2,477 5.00 41,406 2,277 5.50
Cash and due from banks........ 1,267 1,244 926
Allowance for loan losses...... (53) (81) (90)
Premises and equipment......... 718 747 633
Other assets................... 3,154 2,696 2,835
------- ------- -------
Total Assets........... $62,923 $54,095 $45,710
======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits:
Savings.................... $ 2,466 132 5.35 $ 2,656 103 3.89 $ 2,495 108 4.33
Time....................... 313 21 6.75 522 26 4.93 140 7 5.18
Non-U.S.................... 24,615 859 3.48 20,098 583 2.90 16,294 542 3.33
Securities sold under
repurchase agreements........ 19,867 1,182 5.95 16,988 810 4.77 13,775 703 5.11
Federal funds purchased........ 729 46 6.33 842 41 4.90 704 37 5.28
Other short-term borrowings.... 673 40 6.04 508 23 4.62 619 29 4.66
Notes payable.................. 4 6.40
Long-term debt................. 1,080 82 7.62 922 70 7.63 867 66 7.62
------- ------- ------- ------ ------- ------
Total Interest-Bearing
Liabilities............ 49,743 2,362 4.75 42,536 1,656 3.89 34,898 1,492 4.28
------- ------ ------
Non-interest bearing
deposits..................... 7,198 6,527 6,254
Other liabilities.............. 3,052 2,553 2,401
Stockholders' equity........... 2,930 2,479 2,157
------- ------- -------
Total Liabilities and
Stockholders' Equity... $62,923 $54,095 $45,710
======= ======= =======
Net interest revenue........... $ 959 $ 821 $ 785
======= ====== ======
Excess of rate earned over rate
paid......................... .99% 1.11% 1.22%
======= ==== ====
Net Interest Margin(4)......... 1.66% 1.66% 1.90%
======= ==== ====
------------------------------
(1) On October 1, 1999, State Street completed the sale of its commercial
banking business. Average balances for 1999 include $1.7 billion of
commercial, financial and real estate loans that were sold, and $822 million
of interest- and noninterest-bearing deposits that were transferred as part
of the sale.
(2) Amounts reported were with non-U.S. domiciled offices of other banks.
(3) Non-accrual loans are included in the average loan amounts outstanding.
Non-U.S. loans include non-U.S. lease financing.
(4) Net interest margin is taxable-equivalent net interest revenue divided by
average interest-earning assets.
Interest revenue on non-taxable investment securities and loans includes the
effect of taxable-equivalent adjustments, using a federal income tax rate of
35%, adjusted for applicable state income taxes, net of the related federal tax
benefit.
7
The table below summarizes changes in interest revenue and interest expense
due to changes in volume of interest-earning assets and interest-bearing
liabilities, and changes in interest rates. Changes attributed to both volume
and rate have been allocated based on the proportion of change in each category.
2000 COMPARED TO 1999 1999 COMPARED TO 1998
------------------------------------ ------------------------------------
CHANGE IN CHANGE IN NET INCREASE CHANGE IN CHANGE IN NET INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
--------- --------- ------------ --------- --------- ------------
(DOLLARS IN MILLIONS; TAXABLE EQUIVALENT)
Interest revenue related to:
Interest-bearing deposits with banks................ $128 $118 $246 $ 84 $(124) $(40)
Securities purchased under resale agreements and
securities borrowed............................... 144 229 373 150 (55) 95
Federal funds sold.................................. 27 16 43 (7) (3) (10)
Trading account assets.............................. 16 14 30 14 14
Investment securities:
U.S. Treasury and federal agencies.............. 59 62 121 112 (27) 85
State and political subdivisions................ 14 17 31 (3) (3)
Other investments............................... 69 33 102 58 (5) 53
Loans:
U.S............................................. (78) (18) (96) 6 (6)
Non-U.S......................................... (1) (5) (6) 26 (20) 6
---- ---- ---- ---- ----- ----
Total interest-earning assets............... 378 466 844 440 (240) 200
---- ---- ---- ---- ----- ----
Interest expense related to:
Deposits:
Savings......................................... (7) 36 29 7 (12) (5)
Time (10) 5 (5) 20 (1) 19
Non-U.S......................................... 131 145 276 127 (86) 41
Securities sold under repurchase agreements......... 137 235 372 166 (59) 107
Federal funds purchased............................. (5) 10 5 7 (3) 4
Other short-term borrowings......................... 8 9 17 (6) (6)
Long-term debt...................................... 12 12 4 4
---- ---- ---- ---- ----- ----
Total interest-bearing liabilities.......... 266 440 706 325 (161) 164
---- ---- ---- ---- ----- ----
Net Interest Revenue........................ $112 $ 26 $138 $115 $ (79) $ 36
==== ==== ==== ==== ===== ====
INVESTMENT PORTFOLIO
Investment securities consisted of the following at December 31:
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS)
Held to Maturity (at amortized cost):
U.S. Treasury and federal agencies........................ $ 1,272 $ 1,219 $1,177
Other investments......................................... 48 48
------- ------- ------
Total................................................... $ 1,320 $ 1,267 $1,177
======= ======= ======
Available for Sale (at fair value):
U.S. Treasury and federal agencies........................ $ 5,875 $ 6,865 $3,695
State and political subdivisions.......................... 1,680 1,877 1,612
Asset-backed securities................................... 3,280 3,237 1,719
Collateralized mortgage obligations....................... 1,009 831 726
Other investments......................................... 576 626 808
------- ------- ------
Total................................................... $12,420 $13,436 $8,560
======= ======= ======
8
The maturities of debt investment securities at December 31, 2000 and the
weighted average yields (fully taxable-equivalent basis) were as follows:
YEARS
-------------------------------------------------------------------------------------
UNDER 1 1 TO 5 6 TO 10 OVER 10
------------------- ------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
Held to Maturity (at amortized cost):
U.S. Treasury and federal agencies.... $ 745 5.30% $ 527 6.78%
Other investments..................... 25 6.87 $ 23 6.87%
------ ------ ----
Total............................. $ 745 $ 552 $ 23
====== ====== ====
Available for Sale (at fair value):
U.S. Treasury and federal agencies.... $3,964 6.40% $1,713 6.77% $159 7.15% $ 39 7.33%
State and political subdivisions...... 592 6.55 1,063 6.77 23 7.97 2 7.21
Asset-backed securities............... 1,763 6.79 1,109 6.83 137 7.47 271 7.54
Collateralized mortgage obligations... 564 7.09 400 7.10 16 7.21 29 7.56
Other investments..................... 126 4.16 416 4.77 10 7.10 1 6.98
------ ------ ---- ----
Total............................. $7,009 $4,701 $345 $342
====== ====== ==== ====
LOAN PORTFOLIO
U.S. and non-U.S. loans at December 31, and average loans outstanding for
the years ended December 31, were as follows:
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
U.S.:
Commercial and financial.................................. $2,570 $1,908 $4,306 $3,623 $3,022
Lease financing........................................... 433 418 415 296 304
Real estate............................................... 90 74 118
------ ------ ------ ------ ------
Total U.S............................................... 3,003 2,326 4,811 3,993 3,444
------ ------ ------ ------ ------
Non-U.S.:
Commercial and industrial................................. 769 514 505 829 764
Lease financing........................................... 1,364 1,124 917 669 415
Banks and other financial institutions.................... 119 311 60 59 78
Other..................................................... 18 18 16 12 12
------ ------ ------ ------ ------
Total Non-U.S........................................... 2,270 1,967 1,498 1,569 1,269
------ ------ ------ ------ ------
Total loans............................................. $5,273 $4,293 $6,309 $5,562 $4,713
====== ====== ====== ====== ======
Average loans outstanding................................... $5,444 $6,785 $6,347 $5,351 $4,513
====== ====== ====== ====== ======
Loan and lease maturities for selected loan categories at December 31, 2000
were as follows:
YEARS
------------------------------
UNDER 1 1 TO 5 OVER 5
-------- -------- --------
(DOLLARS IN MILLIONS)
U.S.--Commercial and financial.............................. $2,064 $425 $ 81
Non-U.S..................................................... 880 6 1,384
The following table shows the classification of loans due after one year
according to sensitivity to changes in interest rates:
(DOLLARS IN MILLIONS)
Loans and leases with predetermined interest rates.......... $1,416
Loans with floating or adjustable interest rates............ 480
------
Total..................................................... $1,896
======
9
Loans are evaluated on an individual basis to determine the appropriateness
of renewing each loan. State Street does not have a general rollover policy.
Deferred fees included in loans were $1 million for both years ended
December 31, 2000 and 1999. Unearned revenue included in leases was $1.0 billion
and $692 million for non-U.S. leases, and $184 million and $207 million for U.S.
leases, for the years ended December 31, 2000 and 1999, respectively.
NON-ACCRUAL LOANS
It is State Street's policy to place loans on a non-accrual basis when they
become 60 days past due as to either principal or interest, or when in the
opinion of management, full collection of principal or interest is unlikely.
Loans eligible for non-accrual, but considered both well secured and in the
process of collection, are treated as exceptions and may be exempted from
non-accrual status. When the loan is placed on non-accrual, the accrual of
interest is discontinued and previously recorded but unpaid interest is reversed
and charged against net interest revenue. Past due loans are loans on which
principal or interest payments are over 90 days delinquent, but where interest
continues to be accrued.
Non-accrual loans totaled $4 million, $9 million, $12 million, $2 million
and $12 million as of December 31, 2000 through 1996, respectively. There were
no non-accrual loans to non-U.S. clients in 2000, $5 million in 1999, none in
1998, less than $1 million in 1997 and $6 million in 1996.
Past due loans totaled less than $1 million as of each year ended December
31, 2000 through 1996. There were no past due loans included in loans to
non-U.S. clients in 2000, less than $1 million included in loans to non-U.S.
clients in 1999, 1998 and 1997, and none in 1996.
The interest revenue for 2000, which would have been recorded for the
non-accrual loans is less than $1 million for U.S. and less than $1 million for
non-U.S. loans. The interest revenue that was recorded prior to placing the
loans on non-accrual was less than $1 million for U.S. and non-U.S. loans.
10
ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY
The changes in the allowance for loan losses for the years ended December
31, were as follows:
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
Balance at beginning of year:
U.S....................................................... $ 33 $ 65 $ 68 $ 63 $ 54
Non-U.S................................................... 15 19 15 10 9
---- ---- ---- ---- -----
Total allowance for loan losses....................... 48 84 83 73 63
---- ---- ---- ---- -----
Provision for loan losses:
U.S....................................................... 7 10 13 6 7
Non-U.S................................................... 2 4 4 10 1
---- ---- ---- ---- -----
Total provision for loan losses....................... 9 14 17 16 8
---- ---- ---- ---- -----
Loan charge-offs:
U.S.:
Commercial and financial................................ 9 19 1 4
Real estate............................................. 1
Non-U.S................................................. 1 8 6 1
---- ---- ---- ---- -----
Total loan charge-offs................................ 1 17 19 8 5
---- ---- ---- ---- -----
Recoveries:
U.S.:
Commercial and financial................................ 1 3 2 1 3
Real estate............................................. 1 3
Non-U.S................................................. 1 1 1
---- ---- ---- ---- -----
Total recoveries...................................... 1 3 3 2 7
Net loan charge-offs (recoveries)..................... 14 16 6 (2)
---- ---- ---- ---- -----
Transferred upon sale (1):
U.S................................................. 36
---- ---- ---- ---- -----
Balance at end of year:
U.S................................................. 41 33 65 68 63
Non-U.S............................................. 16 15 19 15 10
---- ---- ---- ---- -----
Total allowance for loan losses....................... $ 57 $ 48 $ 84 $ 83 $ 73
==== ==== ==== ==== =====
Ratio of net charge-offs (recoveries) to average loans
outstanding............................................... .00% .22% .24% .11% (.02)%
==== ==== ==== ==== =====
------------------------
(1) On October 1, 1999, State Street completed the sale of its commercial
banking business, which included the transfer of $36 million of the
allowance for loan loss.
State Street establishes an allowance for loan losses to absorb probable
credit losses. Management's review of the adequacy of the allowance for loan
losses is ongoing throughout the year and is based, among other factors, on
previous loss experience, current economic conditions and adverse situations
that may affect the borrowers' ability to repay, timing of future payments,
estimated value of the underlying collateral and the performance of individual
credits in relation to contract terms, and other relevant factors.
While the allowance is established to absorb probable losses inherent in the
total loan portfolio, management allocates the allowance for loan losses to
specific loans, selected portfolio segments and certain off-balance sheet
exposures and commitments. Adversely classified loans in excess of $1 million
are reviewed individually to evaluate risk of loss and assigned a specific
allocation of the allowance. The allocations are based on an assessment of
potential risk of loss and include evaluations of the borrowers' financial
strength, discounted cash flows, collateral, appraisals and guarantees. The
allocations to portfolio segments and off-balance sheet exposures are based on
management's evaluation of relevant factors, including the current level of
problem loans and current economic trends. These allocations are also based on
subjective estimates and management judgment, and are subject to change from
quarter-to-quarter. In addition, a portion of the allowance remains unallocated
as a general reserve for the entire loan portfolio. The general reserve is based
upon such factors as portfolio concentration, historical losses and current
economic conditions.
11
The provision for loan losses is a charge to earnings for the current period
that is required to maintain the total allowance at a level considered adequate
in relation to the level of risk in the loan portfolio. The provision for loan
losses was $9 million, $14 million and $17 million in 2000, 1999 and 1998,
respectively.
At December 31, 2000, loans comprised 8% of State Street's assets. State
Street's loan policies limit the size of individual loan exposures to reduce
risk through diversification.
For 2000, net charge-offs were less than $1 million versus net charge-offs
of $14 million in 1999. Net charge-offs for 2000, as a percentage of average
loans, were less than .01% compared to net charge-offs of .22% for 1999.
At December 31, 2000, total non-performing assets were $15 million, a $6
million decrease from year-end 1999. Non-performing assets include $4 million
and $9 million of non-accrual loans at year-end 2000 and 1999, respectively; $3
million and $4 million of other real estate owned in 2000 and 1999,
respectively; and $8 million at year-end 2000 of a non-performing investment
security.
At December 31, 2000, the allowance for loan losses was $57 million, or
1.08% of total loans. This compares with an allowance of $48 million, or 1.12%
of total loans a year ago. In 2000, the measures of credit quality continued to
be satisfactory.
CROSS-BORDER OUTSTANDINGS
Countries within which State Street has cross-border outstandings (primarily
deposits and letters of credit to banks and other financial institutions) of at
least 1% of its total assets at December 31, were as follows:
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS)
Japan....................................................... $ 3,475 $ 4,253 $2,790
United Kingdom.............................................. 2,424 1,891 897
Germany..................................................... 2,191 2,502 1,610
Canada...................................................... 2,178 1,547 1,053
France...................................................... 1,126 702 874
Australia................................................... 910 1,095 812
Netherlands................................................. 941 987 874
Italy....................................................... 666
------- ------- ------
Total outstanding......................................... $13,245 $12,977 $9,576
======= ======= ======
There were no other individual countries with aggregate cross-border
outstandings between .75% and 1% of total assets at December 31, 2000 and 1999,
and $441 million (Belgium) at December 31, 1998.
DEPOSITS
The average balance and rates paid on interest-bearing deposits for the
years ended December 31, were as follows:
2000 1999 1998
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
U.S.:
Noninterest-bearing deposits......................... $ 7,122 $ 6,453 $ 6,159
Savings deposits..................................... 2,466 5.35% 2,656 3.89% 2,495 4.33%
Time deposits........................................ 313 6.75 522 4.93 140 5.18
------- ------- -------
Total U.S.......................................... $ 9,901 $ 9,631 $ 8,794
======= ======= =======
Non-U.S.:
Noninterest-bearing deposits......................... $ 76 $ 74 $ 95
Interest-bearing deposits............................ 24,615 3.48% 20,098 2.90% 16,294 3.33%
------- ------- -------
Total non-U.S...................................... $24,691 $20,172 $16,389
======= ======= =======
Included in noninterest-bearing deposits were non-U.S. deposits of $263
million at December 31, 2000, $35 million at December 31, 1999 and $83 million
at December 31, 1998.
12
Maturities of U.S. certificates of deposit of $100,000 or more at December
31, 2000 were as follows:
(DOLLARS IN MILLIONS)
3 months or less............................................ $65
3 to 6 months............................................... 7
6 to 12 months.............................................. 4
Over 12 months.............................................. 2
---
Total..................................................... $78
===
At December 31, 2000, substantially all non-U.S. time deposit liabilities
were in amounts of $100,000 or more.
RETURN ON EQUITY AND ASSETS AND CAPITAL RATIOS
The return on equity, return on assets, dividend pay-out ratio, equity to
assets ratio and capital ratios for reported results for the years ended
December 31, were as follows:
2000 1999 1998
-------- -------- --------
Net income to:
Average stockholders' equity.............................. 20.3% 25.0% 20.2%
Average total assets...................................... .95 1.14 .95
Dividends declared to net income............................ 18.7 15.6 19.6
Average stockholders' equity to average assets.............. 4.7 4.6 4.7
Risk-based capital ratios:
Tier 1 capital............................................ 14.5 14.7 14.1
Total capital............................................. 15.6 14.7 14.4
Leverage Ratio.............................................. 5.4 5.6 5.4
SHORT-TERM BORROWINGS
The following table reflects the amounts outstanding and weighted average
interest rates of the primary components of short-term borrowings as of and for
the years ended December 31:
SECURITIES SOLD UNDER
FEDERAL FUNDS PURCHASED REPURCHASE AGREEMENT
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
Balance at December 31.................................. $ 955 $1,054 $ 914 $21,351 $18,399 $12,563
Maximum outstanding at any month end.................... 1,645 1,547 2,241 23,796 18,444 17,643
Average outstanding during the year..................... 729 842 704 19,867 16,988 13,775
Weighted average interest rate at end of year........... 6.30% 5.17% 4.78% 6.17% 5.03% 4.59%
Weighted average interest rate during the year.......... 6.33 4.90 5.28 5.95 4.77 5.11
ITEM 2. PROPERTIES
State Street's headquarters are located in the State Street Bank Building, a
34-story building at 225 Franklin Street, Boston, Massachusetts, which was
completed in 1965. State Street leases approximately 500,000 square feet (or
approximately 54% of the space in this building). The initial lease term was 30
years with two successive extension options of 20 years each at negotiated
rental rates. State Street exercised the first of these two options, which
became effective on January 1, 1996 for a term of 20 years.
State Street owns five buildings located in Quincy, Massachusetts, a city
south of Boston. Four of the buildings, containing a total of approximately
1,365,000 square feet, function as State Street Bank's operations facilities.
The fifth building, with 186,000 square feet, is leased to Boston Financial Data
Services, Inc., a 50% owned affiliate. Additionally, State Street owns a 92,000
square foot building in Westborough, Massachusetts, which is used as a data
center, and a 100,000 square foot data center in Kansas City, Missouri.
The remaining offices and facilities of State Street and its subsidiaries
are leased. As of December 31, 2000, the aggregate mortgages and lease payments,
net of sublease revenue, payable within one year amounted to $129 million plus
assessments for real estate tax, cleaning and operating expenses.
13
For additional information relating to premises, see Note E to the Notes to
the Consolidated Financial Statements included in Part I, Item 8, "Financial
Statements and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS
State Street is subject to pending and threatened legal actions that arise
in the normal course of business. In the opinion of management, after discussion
with counsel, these can be successfully defended or resolved without a material
adverse effect on State Street's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4.A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with regard to each
executive officer of State Street. As used herein, the term "executive officer"
means an officer who performs policy-making functions for State Street.
NAME AGE POSITION YEAR ELECTED
---- -------- -------- ------------
David A. Spina................. 58 Chairman and Chief Executive Officer 2000
Ronald E. Logue................ 55 Vice Chairman and Chief Operating Officer 2000
Nicholas A. Lopardo............ 54 Vice Chairman; Chairman and Chief Executive Officer of State 1997
Street Global Advisors
John R. Towers................. 59 Vice Chairman and Chief Administrative Officer 2000
Maureen Scannell Bateman....... 57 Executive Vice President and General Counsel 1997
Ronald L. O'Kelley............. 55 Executive Vice President, Chief Financial Officer and 1995
Treasurer
All executive officers are elected by the Board of Directors. The Chairman
and Treasurer have been elected to hold office until the next annual meeting of
stockholders or until their respective successors are chosen and qualified.
Other executive officers hold office at the discretion of the Board. There are
no family relationships among any of the directors and executive officers of
State Street. With the exception of Ms. Bateman, all of the executive officers
have been officers of State Street for five years or more.
Ms. Bateman was hired as an executive officer of State Street in 1997. Prior
to joining State Street, she was Managing Director and General Counsel of United
States Trust Company of New York. Prior to that, she had been Vice President and
Counsel at Bankers Trust Company.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information concerning the market prices of and dividends on State Street's
common stock during the past two years appears in Part I, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the caption "Capital." There were 5,623 stockholders of record at December 31,
2000. State Street's common stock is listed on the New York Stock Exchange,
ticker symbol: STT. State Street's common stock is also listed on the Boston and
Pacific Stock Exchanges.
Directors who are also employees of the Corporation or the Bank receive no
compensation for serving as directors or as members of committees. Directors who
are not employees of the Corporation or the Bank received an annual retainer of
$40,000, payable at their election in shares of Common Stock of the Corporation
or in cash, and an award of 424 shares of deferred stock payable when the
director leaves the Board or retires, for services provided during the period
April 2000 through March 2001. In 2000, all outside directors elected to receive
their annual retainer in shares of Common Stock. The directors may elect to
defer either 50% or 100% of all fees and compensation payable in either cash or
stock during any calendar year pursuant to the Corporation's Deferred
Compensation Plan for Directors. Three directors have elected to defer
compensation. An aggregate of 5,338 shares were issued as retainers, and rights
to receive an aggregate of 7,405 deferred shares were awarded, in 2000.
Exemption from registration of the shares is claimed by the Corporation under
Section 4(2) of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER OPERATING(1) REPORTED 5-YEAR
SHARE DATA; TAXABLE EQUIVALENT) 2000 1999 1999 1998 1997 1996 CAGR
------------------------------------------------- -------- ------------ -------- -------- -------- -------- --------
For the years ended December 31,
FEE REVENUE:
Servicing fees................................... $ 1,424 $ 1,170 $ 1,170 $ 1,024 $ 861 $ 711
Management fees.................................. 582 600 600 480 391 307
Foreign exchange trading......................... 387 306 306 289 245 126
Other............................................ 272 236 179 204 176 158
-------- ------- ------- ------- ------- -------
Total fee revenue................................ 2,665 2,312 2,255 1,997 1,673 1,302 19%
Net interest revenue after provision for loan
losses......................................... 950 807 807 768 669 580 16
Net gain on sale of the commercial banking
business....................................... 282
-------- ------- ------- ------- ------- -------
Total operating revenue.......................... 3,615 3,119 3,344 2,765 2,342 1,882 18
Operating expenses............................... 2,644 2,336 2,336 2,068 1,734 1,398 18
-------- ------- ------- ------- ------- -------
Income before income taxes....................... 971 783 1,008 697 608 484 19
Income taxes..................................... 311 254 349 221 184 154
Taxable equivalent adjustment.................... 65 40 40 40 44 37
-------- ------- ------- ------- ------- -------
Net Income....................................... $ 595 $ 489 $ 619 $ 436 $ 380 $ 293 19
======== ======= ======= ======= ======= =======
EARNINGS PER SHARE:
Basic............................................ $ 3.70 $ 3.04 $ 3.85 $ 2.71 $ 2.37 $ 1.81 20
Diluted.......................................... 3.63 2.99 3.78 2.66 2.32 1.78 20
Cash dividends declared per share................ .69 .60 .60 .52 .44 .38 15
Return on equity................................. 20.3% 19.7% 25.0% 20.2% 20.6% 18.1%
As of December 31,
Total assets..................................... $ 69,298 $60,896 $60,896 $47,082 $37,975 $31,524
Long-term debt................................... 1,219 921 921 922 774 476
Stockholders' equity............................. 3,262 2,652 2,652 2,311 1,995 1,775
Closing price per share of common stock.......... 124.21 73.06 73.06 70.13 58.19 32.31
Number of employees.............................. 17,604 17,213 17,213 16,816 14,199 12,792
(1) Operating results, per share data and ratios for 1999 exclude special items
for the gain on the sale of the commercial banking business of
$282 million, net of exit and other associated costs, and a one-time charge
for securities losses of $57 million related to the repositioning of the
investment securities portfolio. These special items increased reported net
income by $130 million, equal to $.81 basic and $.79 diluted earnings per
share.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HIGHLIGHTS OF OUR 208TH YEAR
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA;
TAXABLE EQUIVALENT) 2000 1999(1) CHANGE
-------------------------------------------- -------- ----------- --------
Total Revenue............................................... $3,615 $,3,119 16%
Net Income.................................................. 595 489 22
Earnings Per Share:
Basic....................................................... 3.70 3.04 22
Diluted..................................................... 3.63 2.99 21
Cash Dividends Declared Per Share........................... .69 .60 15
Return on Equity............................................ 20.3% 19.7%
[THE FOLLOWING WAS REPRESENTED AS BAR CHARTS IN THE PRINTED MATERIAL.]
TOTAL REVENUE
(DOLLARS IN MILLIONS)
1991 909 thru 2000 2,675 3,119(1) 3,615
DILUTED EARNINGS PER SHARE
1991 0.91 thru 2000 2.66 2.99(1) 3.63
(1) Operating results, per share data and return on equity for 1999 exclude
significant, non-recurring special items from the gain on the sale of the
commercial banking business of $282 million, net of exit and other
associated costs, and a one-time charge of $57 million on sales of
securities related to the repositioning of the investment portfolio. For
reported results, see Part I, Item 8, "Financial Statements and
Supplementary Data."
TO OUR STOCKHOLDERS
By every measure, 2000 was an outstanding year for State Street. Among our
many achievements, we maintained our superlative record of long-term growth,
turning in our 23rd consecutive year of double-digit growth in earnings per
share. We met this goal by helping our clients succeed: understanding their
investment strategies and the financial markets in which they operate, and
drawing on our experience and industry-leading technology to deliver superior
solutions to them.
We enter 2001 committed to a long-term strategic plan that positions us to
benefit from key industry and demographic trends. Our leadership position in
domestic markets gives us an important competitive edge as we continue to build
and expand relationships with U.S.-based investors. We are also making excellent
progress in extending our leadership to global markets and in claiming our
strong advantage in the quickly-evolving arena of e-business.
FINANCIAL RESULTS Our primary financial goal is to achieve sustainable real
growth in earnings per share. Earnings per share in 2000 increased 21% to $3.63
on a diluted basis, from operating earnings in 1999, bringing our 10-year
compound annual growth rate to 17%.
Revenue from all products increased 16% to $3.6 billion. Adjusted for the
formation of CitiStreet early in the year, our joint venture with Citigroup,
revenue was up 21%.
In support of our earnings goal, we continue to differentiate ourselves by
being one of a few public companies with a stated goal for revenue growth--and
we have exceeded that goal with 14.0% real (inflation-adjusted), compound annual
revenue growth from 1990 through 2000. Our target was to achieve real, compound
annual revenue growth of 12.5%. We have reaffirmed that as one of our goals
through the year 2010.
Our supporting goal for long-term performance is to achieve 18% return on
stockholders' equity. In 2000 we delivered ROE of 20.3%.
At the close of 2000, our Board of Directors voted to authorize a
two-for-one stock split in the form of a 100% stock dividend, subject to the
approval of an increase in the authorized shares by stockholders at the annual
meeting in April 2001. If the increase in authorized shares is approved, new
shares will be distributed on May 30, 2001, to stockholders of record as of
April 30, 2001.
GLOBAL OPPORTUNITIES A number of long-term trends are creating important
opportunities for State Street. One of these trends is a growing preference by
investment managers to outsource activities that fall outside their core
competencies. State Street's broad capabilities and leading market share give us
a clear advantage in outsourcing services. In 2000, we announced several
significant outsourcing wins, and expect to announce other relationships of
similar magnitude over the next few years.
Another important opportunity for State Street has emerged as governments
and employers around the world--especially in Europe, Japan, and the United
States--take steps to strengthen their retirement savings programs. These
efforts will create pools of assets that must be managed and serviced, and State
Street is well positioned to seize a significant share of this new business.
A third opportunity is evolving for us as sophisticated investors begin to
request more help in managing the complexity of today's investment environment.
We are addressing this opportunity by developing investment and trading tools
that simplify the investment process.
16
STRATEGIC PRIORITIES Despite economic uncertainties that began to emerge
during 2000, State Street's broad business base in the United States continues
to offer us significant opportunities for further growth. As a result,
leveraging our leading position in investment services and investment management
remains a top strategic priority for 2001.
In addition, we see enormous opportunity in markets around the world that
are still developing and thus offer untapped growth potential. To seize this
opportunity, we have made global expansion our second strategic priority. Our
primary targets for growth are the United Kingdom (the U.K.), continental
Europe, and Japan.
A third strategic priority for State Street is to claim our advantage in
e-business. We view e-business as a part of a profitable business model that
will serve two purposes: (1) give our clients better access to State Street's
offerings--leading to increased revenues, and (2) enable us to provide clients
with better service at a reasonable cost. Investors who use our sophisticated
electronic trading tools and platforms already view us as a world leader in
e-business. We also have a strong presence on the web through a series of
individual web-based information services. We are continuously developing new
electronic tools and services that will help our clients achieve their
investment goals.
LEADERSHIP TRANSITION During his nine years at our helm, Marshall N. Carter
established State Street as a world leader in financial services, with a highly
competitive portfolio of investment products and services and the technological
power and global reach to support virtually any client investment strategy.
With his retirement at the end of last year, we are transitioning leadership
of the corporation to a proven executive team. This team, which I lead, includes
Ron Logue, Vice Chairman and Chief Operating Officer; Nick Lopardo, Vice
Chairman and also Chairman and Chief Executive Officer of SSgA; and John Towers,
Vice Chairman and Chief Administrative Officer.
I am proud of what we have achieved in the past and am confident and excited
about our prospects for the future. I would like to thank our employees and
stockholders for their continued support. Together, we can look forward to
bringing our company to a new level of strength and achievement as we move into
the new century.
Sincerely,
/s/ David A. Spina
David A. Spina
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
STATE STREET'S LEADERSHIP
FOCUS, EXPERIENCE AND TECHNOLOGY ARE AT THE ROOT OF STATE STREET'S
leadership in the complex and quickly-changing financial services industry
today. These strengths provide a unique resource on which to draw as we work
with our clients to help them achieve financial success. Making our clients
successful is the way we grow our revenue--and the most important way in which
we create value for our stockholders.
FOCUS: State Street has deep relationships with many of the industry's most
sophisticated investors. The diversity of these relationships requires us to
have an unbiased, client-focused approach. We work collaboratively with our
clients to create solutions that are truly the best choices for their business.
Our flexibility and client focus are what attracted Merrill Lynch to us when
they were looking for a partner to assume responsibility for pricing of their
227 mutual funds daily. It's why the Bank of Ireland and Chuo Mitsui Trust are
working with State Street to bring index funds to their markets in Ireland and
Japan.
Our passion for helping our clients succeed engenders confidence and trust
in our clients, and fosters pride and commitment in our employees.
EXPERIENCE: State Street has been in business for over 200 years--a rich
history that has given us an opportunity to develop expertise that is very
valuable to our clients. We have been responsible for many "firsts" in our
industry, including providing accounting services to the first mutual fund,
established by Massachusetts Financial Services in 1924.
Massachusetts Financial Services is still thriving today, and we are still
servicing their funds--a testament to the effectiveness of our
mutually-rewarding relationship and to the wisdom of our focus on achieving
client success.
Because we have played an important role in the financial services industry
for so many years, we truly understand what our clients need today. As our
clients strive to grow their companies globally, they are coming to us for more
than investment management and asset servicing. They are also asking for help in
understanding legal, regulatory, and operational issues in developing markets.
17
TECHNOLOGY: State Street today is one of the world's leading users and
developers of technology. We commit about 20% of our operating expense budget to
technology and technologists, which has enabled us to attract and retain some of
the best technology talent in any industry. COMPUTER WORLD magazine recently
voted State Street one of the top 10 places to work in information technology.
Our clients count on us to provide the technological firepower they need to
invest successfully in today's challenging markets. Innovative information
delivery systems such as State Street Global Link and In~Sight,(SM) and
electronic trading platforms such as FX Connect,-Registered Trademark-
Lattice,(SM) and Bond Connect-Registered Trademark- keep State Street and our
clients on the leading edge.
REPRESENTATIVE OUTSOURCING WINS In May of 2000, Pacific Investment
Management Co. (PIMCO), a leading fixed-income manager with $190 billion in
assets under management, chose State Street as its investment operations
partner. Building on our long-term relationship with PIMCO, we now have full
responsibility for all of the firm's middle/back office functions, including
accounting and administration, investment manager performance reporting, risk
management, and reconciliation with brokers and custodians.
In October, Edinburgh-based Scottish Widows, the United Kingdom's
second-largest fund manager, chose State Street to provide custody, accounting,
trustee and investment administration services for its entire range of life,
pension and investment products totaling $130 billion in assets. This win marks
a significant milestone in the expansion of State Street's business outside the
United States.
INVESTMENT AND TRADING TOOLS State Street Global
Advisors-Registered Trademark- (SSgA-Registered Trademark-) is a leader in the
rapidly-growing market for exchange-traded funds (ETFs), which allows investors
to trade diversified index funds like single stocks. SSgA currently manages and
administers ETFs covering a wide range of sectors, including the
StreetTracks-SM- family of funds, and we are developing ETFs in Europe,
Australia, Singapore and other markets around the world.
Professional investment managers want tools that streamline interactions
with multiple global exchanges, alternative trading systems and internal
crossing networks. State Street's Global Link-Registered Trademark- electronic
delivery network creates order and simplicity for customers by serving as a
single point of contact for research and by routing trades to the appropriate
trading channel or partner. Over 250 investment managers in 21 countries use
State Street Global Link, and our client list is growing.
GROWTH TARGETS The U.K. is very important to us because it's the
third-largest investment market in the world (after the United States and
Japan). State Street already has a strong and growing base of business in the
U.K., and we intend to substantially increase our presence there within the next
few years.
Continental Europe is a growth target because of its large pool of savings,
which only recently began moving from banks and other institutions into
investment products. Pension reform and the introduction of new investment
vehicles such as mutual funds and on-line brokerage will offer excellent
opportunities for us.
Japan is the world's second-largest pension market, a market that is
expected to double over the next five years to exceed $4 trillion by 2005.
Japanese investors are increasingly looking for new tools to control risk and
maximize returns, and collective fund assets are growing.
FINANCIAL REVIEW
This section provides management's discussion and analysis of State Street's
consolidated results of operations for the three years ended December 31, 2000,
and its financial condition at year-end 2000. It should be read in conjunction
with the Consolidated Financial Statements and Supplemental Financial Data
included in Item 1, Part 8, "Financial Statements and Supplementary Data."
State Street is a leading specialist in serving sophisticated investors
worldwide. Among the services State Street provides clients are accounting,
administration, custody, daily pricing, investment management, securities
lending, foreign exchange, cash management, trading and information services.
RESULTS OF OPERATIONS
SUMMARY
State Street Corporation exceeded its financial goals and recorded its 23rd
consecutive year of double-digit earnings per share growth in 2000--an
outstanding year.
State Street reported 2000 earnings per share of $3.63, an increase of 21%
over its 1999 operating earnings per share of $2.99. Net income was
$595 million, up 22% from 1999 operating earnings of $489 million. On a taxable-
18
equivalent basis, total revenue was $3.6 billion, an increase of 16% over 1999
operating revenue of $3.1 billion. Return on stockholder's equity was 20.3%.
State Street's 1999 reported earnings per share were $3.78, its reported net
income was $619 million, and its reported total revenue was $3.3 billion.
Reported results for 1999 differ in that operating results exclude two special
items recorded in the fourth quarter of that year: a gain of $1.00 per share on
the sale of State Street's commercial banking business; and a charge of $.21 per
share related to the repositioning of State Street's investment portfolio. These
special items increased net income by $130 million and total revenue by
$225 million.
State Street's primary financial goal is to achieve sustainable, real
(inflation-adjusted) growth in earnings per share. Over the last five years,
diluted earnings per share increased at a 20% compound annual growth rate. State
Street has two supporting financial goals, one for total revenue and one for
return on stockholders' equity. Revenue increased at a 16% nominal compound
annual growth rate from 1990 through 2000. This exceeds the long-term revenue
goal of 12.5% inflation-adjusted growth from 1990 to 2010, equating to
approximately a 15% compound annual revenue growth rate. Return on stockholders'
equity for 2000 was 20.3%, exceeding State Street's long-term goal of 18%.
Revenue growth is integral to State Street's consistent financial
performance. In 2000, the Corporation increased its revenue by 16% over 1999.
This increase was partially offset by the formation of CitiStreet on April 1,
2000, which reduced revenue for the remaining three quarters of the year, on an
annualized basis, by approximately 6% and was slightly accretive to earnings.
Adjusted for the formation of CitiStreet, the revenue growth would have been
21%. CitiStreet is a 50/50 joint venture designed to service employee benefit
programs. State Street's contribution to the joint venture consisted of its
retirement investment and total benefits outsourcing services. State Street
records its 50% interest in CitiStreet using the equity method.
State Street offers integrated solutions to meet client needs throughout the
investment cycle and focuses on total client relationships. This results in high
client retention, cross-selling opportunities and recurring revenue. Services
are priced based on each client's business relationship. While revenue received
is classified as either fee revenue or net interest revenue, management focuses
on increasing total revenue. Servicing fees, management fees, foreign exchange
trading revenue and net interest revenue all increased significantly during the
year. This growth resulted both from increased business from existing clients'
use of additional services and their intrinsic growth and from new clients
initiating relationships.
Underlying current revenue growth is State Street's ability to serve
clients' expanding needs, arising in part from long-term, global trends: aging
of the world's population, pressures on pay-as-you-go pension systems,
increasing cross-border investing, the growing complexity of investment
strategies, and global consolidation of the financial services industry. By
continuing to invest in technology, integrated products and services that cover
the entire investment process, and expansion into new markets, State Street is
positioned to benefit from these trends.
Expenses grew to support revenue growth. Operating expenses were
$2.6 billion, an increase of 13% over 1999. Adjusted for the formation of
CitiStreet, expenses grew 20%. While the majority of expense growth is directly
attributable to growth in revenue, expenses increased for a number of projects
critical to State Street's long-term growth. Costs were incurred to install
major new clients and for major technology infrastructure projects such as
decimalization, more rapid trade settlement and global straight-through
processing.
In 2000, State Street continued to successfully meet the challenges created
by changing world equity and bond markets and the changing interest rate
environment. State Street's outstanding performance in 2000, the major new
business wins in key markets around the world, and the long-term trends driving
demand for State Street's services bode well for State Street's long-term
prospects. Management remains confident that execution of its strategic business
plan will continue to create value for stockholders.
REVENUE
State Street is one of the world's leading specialists in serving mutual
funds and collective funds, pension plans, investment managers, and others. The
Corporation provides investment management and sophisticated technology and
information processing services to support financial strategies and transactions
for sophisticated global investors. State Street has integrated its products and
services to meet client needs throughout every phase of the investment cycle.
This positions State Street to grow with its clients by providing additional
products and services globally as client requirements expand. State Street's
focus on total client relationships results in high client retention,
cross-selling opportunities and recurring revenue. During 2000, clients
continued to increase the number of State Street products they use. The
Corporation's 1,000 largest clients used an average of 6.3 products in 2000, up
from an average of 6.0 in 1999. The top 100 largest clients used an average of
10.7 products in 2000, up from an average of 10.5 in 1999. In 2000, total
revenue grew 16% from 1999, to $3.6 billion.
[The following tables were represented as bar charts in the printed
material.]
DILUTED EARNINGS PER SHARE (DOLLARS)
1996 1997 1998 1999 2000
--------------------- -------------------- -------------------- -------------------- --------------------
1.78 2.32 2.66 2.99(1) 3.63
TOTAL REVENUE (DOLLARS IN MILLIONS, TAXABLE EQUIVALENT)
1996 1997 1998 1999 2000
--------------------- -------------------- -------------------- -------------------- --------------------
1,882 2,341 2,765 3,119(1) 3,615
State Street's primary financial goal is to achieve sustainable real
(inflation-adjusted) growth in earnings per share. Over the last five years,
operating earnings per diluted share increased at an 18% compound annual growth
rate. State Street's two supporting financial goals are related to revenue
growth and return on stockholders' equity. The long-term revenue goal requires
12.5% real growth, or approximately a 15% nominal compound annual growth rate
from 1990 to 2000. Nominal revenue has increased at a 16% compound annual growth
rate from 1990 through 1999. State Street has extended this revenue growth goal
through 2010. Return on stockholders' equity for 1999 was 19.7%, exceeding State
Street's goal of 18%.
This was State Street's 22nd consecutive year of double-digit earnings per
share growth. State Street's consistent financial performance demonstrates
successful execution of its strategic plan to build value for its stockholders
by continuing to invest in technology, integrated products and services which
cover the entire investment process, and expansion into new markets.
19
FEE REVENUE
Total fee revenue was $2.7 billion in 2000, compared to $2.3 billion in
1999, an increase of 15%. Adjusted for the formation of CitiStreet, total fee
revenue increased 22% from 1999 to 2000.
Growth in fee revenue is due to new business from existing clients
purchasing additional services and their intrinsic growth and from new clients
initiating relationships. In addition, growth is attributable to increases in
foreign exchange trading and processing fee revenues.
20
Servicing and management fees are a function of several factors, including
the mix and volume of assets under custody and assets under management,
securities positions held, and portfolio transactions, as well as types of
products and services used by clients. If equity values worldwide were to
increase or decrease by 10%, State Street estimates that this, by itself, would
cause approximately a 2% change in State Street's total revenue, based on a 2000
study. If bond values were to change by 10%, State Street would anticipate a 1%
change in its total revenue.
FEE REVENUE
CHANGE
(DOLLARS IN MILLIONS) 2000 1999(1) 1998 99-00
--------------------- -------- -------- -------- --------
Servicing fees.............................................. $ 1,424 $1,170 $1,024 22%
Management fees............................................. 582 600 480 (3)
Foreign exchange trading.................................... 387 306 289 26
Processing fees............................................. 240 209 177 15
Other....................................................... 32 27 27 21
------- ------ ------
TOTAL FEE REVENUE........................................... $ 2,665 $2,312 $1,997 15
======= ====== ======
------------------------
(1) 1999 results exclude special items
SERVICING FEES
In 2000, servicing fees were $1.4 billion, up 22% from 1999. Servicing fees
increasingly reflect clients' use of multiple services, including U.S. and
offshore mutual funds, accounting, administration, custody, daily pricing,
securities lending, performance and analytics, compliance monitoring, and
operations outsourcing for investment managers. State Street's clients use other
complementary services that are recorded in other revenue categories, such as
foreign exchange trading revenue and net interest revenue.
MUTUAL FUNDS AND COLLECTIVE FUNDS Servicing fees include fee revenue from
U.S. mutual funds, collective funds worldwide, non-U.S. retirement plans and
other non-U.S. investment pools, for which State Street provides custody,
portfolio accounting, fund accounting and administration, daily pricing,
securities lending, and trusteeship services and other related services.
State Street is the largest mutual fund custodian and accounting agent in
the United States. State Street provides custody services for 42% of registered
U.S. mutual funds, and is distinct from other mutual fund service providers
because clients make extensive use of a number of related services, including
accounting, daily pricing and fund administration. The Corporation provides fund
accounting and valuation services for more than four times the assets serviced
by the next largest accounting service provider. State Street calculates 27% of
the U.S. mutual fund prices that appear daily in THE WALL STREET JOURNAL.
Services such as fund accounting and administration, accounting for multiple
classes of shares and master/feeder funds, and accounting for offshore funds and
local funds in locations outside the United States contribute to servicing fees.
Shareholder services are provided through 50%-owned affiliates, Boston Financial
Data Services, Inc. and European Financial Data Services Limited.
In 2000, revenue growth from servicing U.S. mutual funds was primarily due
to new business, from both expanding relationships with existing clients and new
clients. A long-term revenue driver is the number of mutual funds the
Corporation services. In 2000, the total number of funds State Street serviced
increased by 396, or 10%, to 4,339. There were 867 new funds serviced, 809 from
existing clients and 58 from new clients, partially offset by 471 funds no
longer serviced due primarily to fund liquidations and consolidations.
[The following table was represented as a bar chart in the printed
material.]
MUTUAL FUNDS SERVICED
1996 1997 1998 1999 2000
--------------------- -------------------- -------------------- -------------------- --------------------
2,974 3,321 3,661 3,943 4,339
In August 2000, Merrill Lynch selected State Street to assume all fund
accounting and daily pricing responsibility for its $200 billion in U.S. retail
mutual funds beginning in January 2001. In connection with the transfer,
approximately 300 former Merrill Lynch employees joined State Street in offices
located in Princeton, N.J. In December 2000, Liberty Financial Companies
appointed State Street as the provider of fund accounting, daily pricing and
financial reporting for all of its fund management companies, comprising of 141
portfolios with a total asset value of approximately $39 billion.
State Street is committed to expanding globally by serving the worldwide
needs of both its U.S. and non-U.S. domiciled clients. Growth in servicing fees
in the United Kingdom, Europe, Asia/Pacific, and Canada was strong in 2000.
Growth in revenue in Europe was attributable to new business from new clients,
including revenue from
21
previously announced acquisitions and alliances, and increased fees based on
transaction volumes. Growth in servicing fees in Asia/Pacific was from
additional funds and growth in assets of existing clients.
During 2000, State Street expanded the array of services it provides
investment managers. Investment management operations outsourcing enables State
Street to provide global asset managers with a comprehensive suite of services,
from trade order management through settlement. Services include assuming
securities trade order processing, custodian communications for settlements,
accounting systems, networks and information technology development. In
May 2000, Pacific Investment Management Co. ("PIMCO") selected State Street to
provide an expanded array of investment manager operations services at its
Newport Beach, CA location. PIMCO manages approximately $190 billion in
investments. These services commenced in August 2000. In October 2000, Scottish
Widows Group appointed State Street, beginning in 2001, to provide custody,
trustee and investment administration services for its entire range of life,
pensions and investment products, totaling approximately $130 billion in assets.
U.S. PENSION, INSURANCE AND OTHER INVESTMENT POOLS State Street provides
trusteeship, custody, portfolio accounting, securities lending, information and
other related services for retirement plans and other financial asset portfolios
of corporations, public funds, investment managers, not-for-profit
organizations, unions and others in the U.S. Services provided include
performance and analytics, global reporting, compliance monitoring and other
services that institutional clients require to meet their changing needs.
Institutional clients make extensive use of many State Street products and
services, including brokerage, foreign exchange, and investment management. In
2000, revenue growth was driven by a combination of factors, including business
from new and existing clients, increased securities lending revenue, and the
acquisition of an institutional trust and custody business in late 1999.
State Street has a leading share of the market for servicing U.S. tax-exempt
assets for corporate and public pension funds. Over the past five years, State
Street's market share has grown from 22% to 26%. Additionally, State Street
provides trust and valuation services for over 3,800 daily-priced, unitized
defined contribution accounts, making State Street a market leader.
ASSETS UNDER CUSTODY AS OF DECEMBER 31,
1-YEAR 5-YEAR
(DOLLARS IN BILLIONS) 2000 1999 1998 1997 1996 AGR CAGR
--------------------- -------- -------- -------- -------- -------- -------- --------
CLIENTS IN THE U.S.:
Mutual funds........................................ $ 2,664 $2,769 $2,144 $1,705 $1,281 (4)% 22%
Pensions, insurance and other
investment pools.................................... 2,803 2,669 2,306 1,932 1,459 5 20
Clients outside the U.S............................. 651 514 362 266 202 27 34
------- ------ ------ ------ ------
TOTAL............................................... $ 6,118 $5,952 $4,812 $3,903 $2,942 3 22
======= ====== ====== ====== ======
ASSETS UNDER CUSTODY At year-end 2000, total assets under custody were $6.1
trillion, up $166 billion, or 3%, from 1999. Approximately 54% of these assets
were equities, 28% were fixed income instruments, and 18% were short-term
instruments. Non-U.S. securities comprised 14% of total assets under custody,
with emerging markets securities comprising less than 1%.
[The following table was represented as a bar chart in the printed
material.]
ASSETS UNDER CUSTODY FOR NON-U.S. CUSTOMERS
DOLLARS IN BILLIONS
1996 1997 1998 1999 2000
--------------------- -------------------- -------------------- -------------------- --------------------
202 266 362 514 651
The value of assets under custody is a broad measure of the relative size of
various markets served. Market value changes, as measured by one-day year-end
indices, had a significant impact on the value of year-end assets under custody.
At December 31, 2000, the S&P 500 index was down 10% from year-end 1999, the
NASDAQ index, down 39%, the MSCI EAFE index, down 15%, and the Lehman Bond
index, up 12%. As noted earlier, changes in the value of assets under custody do
not result in proportional changes in revenue. This is due to the many services
that are priced on factors other than asset size, including the mix of assets
under custody, securities positions held, portfolio transactions, types of
products and services, and State Street's relationship pricing for clients who
use multiple services.
MANAGEMENT FEES
In 2000, management fees were $582 million, down 3% from 1999; however,
adjusted for the formation of CitiStreet, these fees increased 22% from 1999 to
2000. State Street provides an extensive range of investment management
strategies, securities lending, specialized investment management advisory
services, and investment management and other financial services for
corporations, public funds, high-net-worth individuals, and other sophisticated
investors. These services are offered through State Street Global
Advisors-Registered Trademark- (SSgA-Registered Trademark-). SSgA is the sixth
22
largest asset manager in the world and the largest manager of tax-exempt
(primarily pension) assets in the United States.
SSgA offers a broad array of investment strategies, including passive,
enhanced and active management using quantitative and fundamental methods for
both domestic and global equities and fixed income securities. Fees are based on
the investment strategy, the amount of the investment, and the client's total
State Street relationship. During 2000, State Street continued to develop new
products and distribution channels. As an example, State Street, which helped
develop exchange-traded funds with the American Stock Exchange, provides
investment and trust services for approximately half of exchange-traded fund
assets worldwide. In addition, State Street announced the formation of
Schoolhouse Capital, LLC in November 2000. Schoolhouse Capital, LLC provides
asset management and administration services for Section 529 college savings
plans.
In 2000, the increase in management fees, adjusted for the formation of
CitiStreet, reflected strong sales growth partially offset by the decline in
global equity markets during the latter half of the year. Sales growth was
primarily from clients installed in 2000, and the full-year impact of clients
installed late in 1999. Growth was also attributable to increases in the value
of assets of existing clients in the first part of the year. Non-U.S. management
fees increased significantly, reflecting new business in State Street's Tokyo,
London and Sydney locations. Revenue growth reflected increased use of U.S.
passive and active equity strategies and fixed income strategies, including
short-term investments, and securities lending. In addition, revenue growth
reflected fees from private asset management for high-net-worth individuals.
While certain management fees are directly determined by the value of assets
under management and the investment strategy employed, management fees reflect
other factors as well, including State Street's relationship pricing for clients
who use multiple services, performance-related fees and revenues from securities
lending.
ASSETS UNDER MANAGEMENT AS OF DECEMBER 31,
1-YEAR 5-YEAR
(DOLLARS IN BILLIONS) 2000 1999 1998 1997 1996 AGR CAGR
--------------------- -------- -------- -------- -------- -------- -------- --------
Equities:
Passive.............................................. $ 365 $366 $237 $168 11$9... 34%
Active............................................... 44 42 34 26 20 5% 20
Employer securities.................................. 75 76 59 51 39 (1) 17
Fixed income......................................... 44 39 32 28 24 13 18
Money market......................................... 183 144 123 117 90 27 20
----- ---- ---- ---- ----
TOTAL................................................ $ 711 $667 $485 $390 $292 7 26
===== ==== ==== ==== ====
ASSETS UNDER MANAGEMENT At year-end 2000, assets under management had
increased $44 billion to $711 billion, or 7%, from year-end 1999. Non-U.S.
securities comprised 22% of total securities, with emerging markets securities
comprising 1%.
[The following table was represented as a bar chart in the printed
material.]
ASSETS UNDER MANAGEMENT
DOLLARS IN BILLIONS
1996 1997 1998 1999 2000
--------------------- -------------------- -------------------- -------------------- --------------------
292 390 485 667 711
The value of assets under management is a broad measure of the relative size
of various markets served. Market value changes, as measured by one-day year-end
indices, had a significant impact on the value of year-end assets under
management. At December 31, 2000, the S&P 500 index was down 10% from year-end
1999, the NASDAQ index, down 39%, the MSCI EAFE index, down 15%, and the Lehman
Bond index, up 12%.
FOREIGN EXCHANGE TRADING
In 2000, foreign exchange trading revenue increased 26%, to $387 million.
Foreign exchange trading revenue is influenced by three principal factors: the
volume of foreign exchange transactions, currency volatility and the number of
clients doing business with State Street. In 2000, trading volumes were strong,
both in the number and total U.S. dollar value of transactions, up 43% from
1999. The impact of volume growth was partially offset by decreased volatility
in 2000. As measured by State Street's index of 43 currencies, volatility
decreased 2% from 1999. State Street has increased its foreign exchange trading
client base with State Street Global Link,-Registered Trademark- a sophisticated
research and execution delivery network for investment managers. Global Link
continues to attract new clients worldwide with information and advisory
services, electronic trade execution, and trade confirmation and reporting
capabilities. Global Link is now installed at over 250 investment managers in 21
countries.
23
Development of a comprehensive range of foreign exchange services to meet
the needs of institutional investors helped State Street earn the number four
ranking for "Best FX Service Overall" in the most recently conducted worldwide
survey of global foreign exchange providers by GLOBAL INVESTOR magazine.
PROCESSING FEES
Processing fee revenue includes fees from brokerage services, software
licensing and maintenance, loans, investment banking, and trade banking.
Processing fee revenue of $240 million was up 15% from 1999, primarily due to
growth in brokerage services. Brokerage services revenue was $95 million, up
$28 million, or 42%, from 1999. Brokerage services include portfolio transition
and rebalancing management, self-directed brokerage for 401(k) participants,
commission recapture and electronic equity trading. Client portfolio transition
and rebalancing management grew strongly in 2000.
OTHER FEE REVENUE
Other fee revenue includes profits or losses from joint ventures, gains and
losses on sales of investment securities, leased equipment and other assets,
trading account profits and losses, and amortization of investments in
tax-advantaged financings. Other fee revenue of $32 million in 2000 was up
$5 million, or 21%, from 1999, excluding special items recorded in 1999, driven
by improvements in earnings from joint ventures and trading account profits.
NET INTEREST REVENUE
In serving sophisticated global investors, State Street provides short-term
funds management, deposit services and repurchase agreements for cash positions
associated with clients' investment activities.
NET INTEREST REVENUE
CHANGE
(DOLLARS IN MILLIONS; TAXABLE EQUIVALENT) 2000 1999 1998 99-00
----------------------------------------- -------- -------- -------- --------
Interest revenue............................................ $ 3,256 $2,437 $2,237
Taxable equivalent adjustment............................... 65 40 40
------- ------ ------
............................................................ 3,321 2,477 2,277
Interest expense............................................ 2,362 1,656 1,492
------- ------ ------
Net interest revenue........................................ 959 821 785 17%
Provision for loan losses................................... 9 14 17
------- ------ ------
Net interest revenue after provision for loan losses........ $ 950 $ 807 $ 768 18
======= ====== ======
Net interest revenue on a fully taxable-equivalent basis was $959 million in
2000, compared to $821 million in 1999, an increase of 17%. The increase was
achieved despite the impact of the sale of State Street's commercial banking
business on October 1, 1999. The increase in net interest revenue of
$138 million resulted from a larger average balance sheet from increased client
investment activities, including a higher volume of noninterest-bearing
deposits, and improved interest rate spreads.
The average balance sheet for 2000 increased $8.8 billion over 1999 to
accommodate increased client investment activity. As State Street continued to
expand, installing new clients and benefiting from existing clients' growth and
use of additional services, these clients, in conjunction with their worldwide
investment activities, increased their level of deposits and securities sold
under repurchase agreements.
The provision for loan losses is the amount charged to earnings during the
current period to maintain the allowance for loan losses at a level that
management considers appropriate, relative to the level of risk in the loan
portfolio and other extensions of credit. The provision for loan loss was
$9 million in 2000, down from $14 million in 1999, reflecting, in part, the
reduction in risk attributable to the October 1999 sale of the commercial
banking business.
OPERATING EXPENSES
Operating expenses were $2.6 billion in 2000, an increase of 13% from
$2.3 billion in 1999. Adjusted for the formation of CitiStreet, expenses grew
20%. This 20% expense growth supports the 21% revenue growth, certain customized
client service and technology requirements, and technology spending considered
necessary to achieve long-term growth.
24
OPERATING EXPENSES
CHANGE
(DOLLARS IN MILLIONS) 2000 1999 1998 99-00
--------------------- -------- -------- -------- --------
Salaries and employee benefits.............................. $ 1,524 $1,313 $1,175 16%
Information systems and communications...................... 305 287 241 6
Transaction processing services............................. 268 237 196 13
Occupancy................................................... 201 188 164 6
Other....................................................... 346 311 292 11
------- ------ ------ --
TOTAL OPERATING EXPENSES.................................... $ 2,644 $2,336 $2,068 13
======= ====== ====== ==
Salaries and employee benefits expense totaled $1.5 billion. Adjusted for
the formation of CitiStreet, these expenses were up 24%. The increase was due to
growth in performance-based incentive compensation reflecting State Street's
strong financial results for the year and the year-over-year growth in the
Corporation's stock price, additional staff hired to support new business
growth, and competitive salary increases reflecting the tight labor market.
Information systems and communications expense totaled $305 million, up 6%.
Adjusted for the formation of CitiStreet, these expenses were up 12%. The
increase was due to continuing and expanded client service needs, primarily for
the Investment Services line of business, and expansion of business capacity
through information technology, including expenses related to processing and
storage capacity. State Street achieved favorable processing efficiencies in its
computer-operating environment in 2000.
Transaction processing services expenses totaled $268 million, up 13%.
Expenses included in this category are volume related and include external
contract services, subcustodian fees, brokerage services and fees related to
securities settlement. The increase is due primarily to fees that are associated
with increased mutual fund shareholder activities and brokerage transaction
expenses associated with the corresponding increase in brokerage revenue.
Occupancy expense totaled $201 million, up 6%. The increase relates to
expenses necessary to support State Street's global growth, and expenses
incurred for leasehold improvements and other operational costs.
Other expenses totaled $346 million, up 11%. These expenses include
professional services, advertising and sales promotion, and internal operational
expenses. The increase over prior year is primarily due to professional fees
related to increased global client service, as well as preparation for mandated
industry changes including decimalization of securities prices, more rapid trade
settlement and adoption of global straight-through processing.
INCOME TAXES
Income tax expense totaled $311 million in 2000, compared to $254 million in
1999, excluding special items. In 2000, the effective tax rate was 34.3%,
compared to 34.1% in 1999, excluding the effect of special items.
ACQUISITIONS, ALLIANCES AND DIVESTITURES
In executing its strategic plan, State Street may enter into business
acquisitions and strategic alliances, and may divest nonstrategic operations.
Acquisitions and strategic alliances enhance established capabilities by adding
new products, services or technologies, expanding geographic reach, or
selectively expanding market share. State Street continuously reviews and
assesses various business opportunities related to this strategy. During 2000,
State Street completed or announced several important acquisitions and
alliances, including these highlighted below.
In April 2000, State Street and Citigroup completed the formation of
CitiStreet, a 50/50 joint venture to service employee benefit programs. State
Street's contribution to the joint venture consisted of its retirement
investment and total benefits outsourcing services.
In June 2000, State Street formed an alliance with Industrial and Commercial
Bank of China, China's largest and state-owned commercial bank, to provide
investment management and administration services for China's first-ever
open-end mutual funds.
In August 2000, State Street announced its intention to form a joint venture
investment advisory company in Japan with The Chuo Mitsui Trust and Banking
Co., Ltd. The new joint venture, headquartered in Tokyo, Japan, will be called
Chuo Mitsui State Street Advisors Co., Ltd., and will act as an investment
advisor specializing in passive investment strategies for Japan's pension
market.
In December 2000, State Street announced its intention to purchase a
majority interest in Bel Air Investment Advisors, LLC, to enhance its investment
management services to ultra high-net-worth individuals.
25
COMPARISON OF 1999 VERSUS 1998
In 1999, diluted operating earnings per share increased 12%, to $2.99, from
1998. Total taxable-equivalent operating revenue increased 13% to $3.1 billion,
and return on stockholders' equity was 19.7%, as compared to 20.2% in 1998.
Operating results for 1999 exclude significant, non-recurring special items
recorded in the fourth quarter: a gain of $282 million, or $1.00 per diluted
share on the sale of State Street's commercial banking business; and a one-time
charge, reported in other fee revenue, of $57 million, or $.21 per diluted
share, on sales of securities relating to the repositioning of State Street's
investment portfolio. Reported net income for 1999, which includes those special
items, was $3.78 per diluted share, and total reported revenue for 1999 was
$3.3 billion. Reported return on stockholders' equity was 25.0%.
Total revenue grew in all services and was driven by new business worldwide,
including existing clients' use of additional products and services and new
relationships. Growth was offset slightly by the divestiture of the commercial
banking business on October 1, 1999.
LINES OF BUSINESS
State Street reports two lines of business: Investment Services and
Investment Management. Historical operating results for the commercial banking
business, sold in 1999, are presented separately under the caption Business
Divestiture. Given the unique nature of State Street's services, the results of
operations for these lines of business are not necessarily comparable with those
of other companies.
Revenue and expenses are directly charged or allocated to the lines of
business through algorithm-based management information systems. State Street
prices its products and services on total client relationships and other
factors; therefore, revenues may not necessarily reflect market pricing on
products within the business lines in the same way as they would for independent
business entities. Assets and liabilities are allocated according to rules that
support management's strategic and tactical goals. Capital is allocated based on
risk-weighted assets employed and management's judgment. The capital allocations
may not be representative of the capital that might be required if these lines
of business were independent business entities.
In the following table, certain previously reported line of business
information has been reclassified to conform to the current method of
presentation. The table excludes special items for 1999. See Note M to the
Consolidated Financial Statements included in Part I, Item 8, "Financial
Statements and Supplementary Data."
The following is a summary of the lines of business and business divestiture
operating results for the years ended December 31:
LINES OF BUSINESS
BUSINESS
INVESTMENT SERVICES INVESTMENT MANAGEMENT DIVESTURE
(DOLLARS IN MILLIONS; ------------------------------ ------------------------------ -------------------
TAXABLE EQUIVALENT) 2000 1999(1) 1998 2000 1999(1) 1998 1999(1) 1998
------------------------------------------ -------- -------- -------- -------- -------- -------- -------- --------
Fee revenue:
Servicing fees............................ $ 1,424 $1,170 $1,024
Management fees........................... $ 582 $600 $480
Foreign exchange trading.................. 387 306 289
Other..................................... 176 153 155 96 68 34 $ 15 $ 15
------- ------ ------ ----- ---- ---- ---- ----
Total fee revenue......................... 1,987 1,629 1,468 678 668 514 15 15
Net interest revenue after
provision for loan losses................. 851 685 641 99 49 44 73 83
------- ------ ------ ----- ---- ---- ---- ----
Total revenue............................. 2,838 2,314 2,109 777 717 558 88 98
Operating expense......................... 2,047 1,702 1,559 597 596 461 38 48
------- ------ ------ ----- ---- ---- ---- ----
INCOME BEFORE
INCOME TAXES.............................. $ 791 $ 612 $ 550 $ 180 $121 $ 97 $ 50 $ 50
======= ====== ====== ===== ==== ==== ==== ====
Pre-tax margin............................ 28% 27% 26% 23% 17% 17% 57% 51%
Average assets (billions)................. $ 61.2 $ 51.2 $ 42.8 $ 1.7 $1.1 $ .9 $1.8 $2.0
------------------------
(1) 1999 results exclude special items
26
INVESTMENT SERVICES
Investment Services includes accounting, administration, custody, daily
pricing, operations outsourcing for investment managers, securities lending,
foreign exchange, recordkeeping, deposit and short-term investment facilities,
lease financing, and information services. These services support sophisticated
investors in developing and executing their strategies, enhancing their returns,
and evaluating and managing risk. Clients around the world include mutual funds
and other collective investment funds, corporate and public pension plans,
corporations, investment managers, not-for-profit organizations, unions, and
other holders of investment assets. During 2000, State Street began providing an
expanding array of operational outsourcing services to investment management
clients. This enables State Street to provide global asset managers with a
comprehensive suite of services, from trade order management through settlement.
Revenue from Investment Services comprised 79% of State Street's total revenue
for 2000.
Total revenue increased to $2.8 billion, up 23% from $2.3 billion in 1999.
The $524 million increase in total revenue was driven by expanding relationships
with clients who are growing and using more services, and the installation of
new business.
Fee revenue was up $358 million, or 22%, due to growth in servicing fees and
foreign exchange trading revenue. Servicing fees, up 22%, reflected substantial
revenue increases from accounting, custody and securities lending for both U.S.
and non-U.S. clients. Foreign exchange trading revenue grew 26% from a year ago
and reflects the volume of cross-border transactions and the number of clients
doing business with State Street, offset slightly by a decrease in currency
volatility.
Net interest revenue, up 24%, reflected balance sheet growth from clients'
increased use of securities sold under repurchase agreements and non-U.S.
deposits. In 2000, client funds, including non-U.S. deposits, repurchase
agreements and noninterest-bearing deposits, grew substantially.
Operating expenses were $2.0 billion, 20% higher than in 1999, due to higher
salaries, benefits and performance-based incentive compensation, higher
transaction processing expenses reflecting increased business volumes, and
investment spending incurred for new products, efficiency initiatives, global
expansion and infrastructure projects such as more rapid trade settlement and
global straight-through processing.
In 2000, income before income taxes was $791 million, an increase of
$179 million, or 29%, from 1999.
INVESTMENT MANAGEMENT
State Street offers a broad array of services for managing financial assets
worldwide for both institutions and individual investors. Services include
passive and active equity, money market, and fixed income strategies, and
brokerage and other related services.
Total revenue increased 8%, to $777 million. Adjusted for the formation of
Citistreet, total revenue was up 35%. Growth in Investment Management total
revenue reflected new business and expanding relationships with existing
clients. In addition, revenue growth was driven by strong performance in equity
brokerage services, including client portfolio transition and rebalancing
management.
Operating expenses increased $1 million to $597 million. Adjusted for the
formation of Citistreet, expenses were up 40%, reflecting higher salaries,
benefits and performance-based incentive compensation, and higher transaction
processing fees due to increased brokerage volumes.
In 2000, income before income taxes was $180 million, an increase of
$59 million, or 49%, from 1999. Pre-tax margins increased from 1999, primarily
reflecting the impact of the formation of Citistreet.
BUSINESS DIVESTITURE
Business divestiture includes historical operating results for the
commercial banking business. On October 1, 1999, State Street sold this
business, which consisted of a $2.4 billion loan portfolio, a $36 million
allowance for loan losses and $1.1 billion in deposits. The historical revenue
and expenses of this business include allocations of other items in accordance
with existing methodologies for line of business presentation.
FINANCIAL GOALS AND FACTORS THAT MAY AFFECT THEM
State Street's primary financial goal is sustainable real growth in earnings
per share. The Corporation has two supporting goals, one for total revenue
growth and one for return on common stockholders' equity (ROE). The long-term
revenue goal is for a 12.5% real, or inflation-adjusted, compound annual growth
rate of revenue from 1990
27
through 2010. At present, this equates to approximately a 15% nominal compound
annual growth rate. The annual ROE goal is 18%.
State Street considers these to be financial goals, not projections or
forward-looking statements. However, the discussion in this Financial Review,
and in other portions of this Annual Report, 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 Annual
Report speak only as of the time the statements were given, and the Corporation
does not undertake to revise those forward-looking statements to reflect events
after the date of this report.
Based on evaluation of the following factors, management is currently
optimistic about the Corporation's long-term prospects.
CROSS-BORDER INVESTING Increases in cross-border investing by clients
worldwide benefit State Street's revenue. Future revenue may increase or
decrease depending upon the extent of increases or decreases in cross-border
investments made by clients or future clients.
SAVINGS RATE OF INDIVIDUALS State Street benefits from the savings of
individuals that are invested in mutual funds and other collective funds or in
defined contribution plans. Changes in savings rates or investment styles may
affect revenue.
VALUE OF WORLDWIDE FINANCIAL MARKETS As worldwide financial markets
increase or decrease in value, State Street's opportunities to invest and
service financial assets may change. Since a portion of the Corporation's fees
are based on the value of assets under custody and management, fluctuations in
worldwide securities market valuations will affect revenue.
DYNAMICS OF MARKETS SERVED Changes in markets served, including the growth
rate of collective funds worldwide, the pace of debt issuance, outsourcing
decisions, and mergers, acquisitions and consolidations among clients and
competitors, can affect revenue. In general, State Street benefits from an
increase in the volume of financial market transactions serviced.
State Street provides services worldwide. Global and regional economic
factors and changes or potential changes in laws and regulations affecting the
Corporation's business, including volatile currencies, changes in monetary
policy, and social and political instability, could affect results of
operations.
INTEREST RATES Market interest rate levels, the shape of the yield curve
and the direction of interest rate changes affect net interest revenue as well
as securities lending revenue recorded in servicing and management fees. All
else being equal, in the short term, State Street's net interest revenue
benefits from falling interest rates and is negatively affected by rising rates
because interest-bearing liabilities reprice sooner than interest-earning
assets. In general, sustained lower interest rates have a constraining effect on
the net interest revenue growth rate.
VOLATILITY OF CURRENCY MARKETS The degree of volatility in foreign exchange
rates can affect the amount of foreign exchange trading revenue. In general,
State Street benefits from currency volatility.
PACE OF PENSION REFORM State Street expects to benefit from worldwide
pension reform that creates additional pools of assets that use custody and
related services, and investment management services. The pace of pension reform
and resulting programs, including public and private pension schemes, may affect
the pace of revenue growth.
PRICING/COMPETITION Future prices the Corporation is able to obtain for its
products may increase or decrease from current levels depending upon demand for
its products, its competitors' activities and the introduction of new products
into the marketplace.
PACE OF NEW BUSINESS The pace at which existing and new clients use
additional services and assign additional assets to State Street for management
or custody will affect future results of operations.
BUSINESS MIX Changes in business mix, including the mix of U.S. and
non-U.S. business, may affect future results of operations.
28
RATE OF TECHNOLOGICAL CHANGE Technological change creates opportunities for
product differentiation and reduced costs, as well as the possibility of
increased expenses. Developments in the securities processing industry,
including shortened settlement cycles and ultimately
straight-through-processing, will result in changes to existing procedures.
Alternative delivery systems have emerged, including the widespread 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.
There are risks inherent in this process. These include rapid technological
change in the industry, the Corporation's ability to access technical and other
information from clients, and the significant and ongoing investments required
to bring new services to market in a timely fashion at competitive prices.
Further, there is risk that competitors may introduce services that could
replace or provide lower-cost alternatives to State Street's services.
State Street uses appropriate trademark, trade secret, copyright and other
proprietary rights procedures to protect its technology, and has applied for a
limited number of patents in connection with certain software programs. However,
in the event a third party asserts a claim of infringement of its proprietary
rights, obtained through patents or otherwise, against the Corporation, State
Street may be required to spend significant resources to defend against such
claims, develop a non-infringing program or process, or obtain a license to the
infringed process.
ACQUISITIONS AND ALLIANCES Acquisitions of complementary businesses and
technologies and development of strategic alliances are an active part of State
Street's overall business strategy. The Corporation has completed several
acquisitions and alliances in recent years. However, there can be no assurance
that services, technologies, key personnel and businesses of acquired companies
will be effectively assimilated into State Street's business or service
offerings or that alliances will be successful.
GRAMM-LEACH-BLILEY ACT OF 1999 The Gramm-Leach-Bliley Act of 1999, enacted
by the U.S. Congress, may cause changes in the competitive environment in which
State Street operates. Such changes could include, among other things,
broadening the scope of activities of significant competitors, or facilitating
consolidation of competitors into larger, better-capitalized companies, offering
a wide array of financial services and products, and attracting large and
well-capitalized financial services companies into activities not previously
undertaken but competitive to the Corporation's traditional businesses. In
addition, the Corporation's ability to engage in new activities may expose it to
business risks with which it has less experience than it has with the business
risks associated with its traditional businesses. Such changes and the ability
of the Corporation to address and adapt to the regulatory and competitive
challenges may affect future results of operations.
BALANCE SHEET
State Street provides deposit and other balance sheet services to its
institutional investor clients. In executing their worldwide cash management
activities, State Street's clients use short-term investments and deposit
accounts that comprise the majority of State Street's liabilities. State
Street's client business mix results in a distinctive composition of its balance
sheet, which affects the Corporation's approach to managing interest rate
sensitivity, liquidity and credit risk.
LIABILITIES
The growth in State Street's balance sheet is primarily driven by growth in
liabilities from clients' activities. State Street uses its excess balance sheet
capacity to support clients' transactions and short-term investment strategies.
State Street's objectives and clients' needs determine the volume, mix and
currencies of the liabilities.
Average interest-bearing liabilities increased $7.2 billion, or 17%, in
2000. The most significant growth in liabilities occurred in non-U.S. time, call
and transaction deposits, used by both non-U.S. and U.S. clients; and in
securities sold under repurchase agreements, used primarily by mutual fund
clients. Interest-bearing liabilities not denominated in U.S. dollars represent
27% of total interest-bearing liabilities. Non-U.S. deposits grew 22%, to
$24.6 billion; 50% of this balance consists of transaction account balances,
which pay lower interest rates than other interest-bearing sources of funds.
Securities sold under repurchase agreements increased 17%, to an average of
$19.9 billion for the year.
Average noninterest-bearing deposits grew $672 million, or 10%. Clients use
noninterest-bearing deposit accounts for transaction settlements and to
compensate State Street for services.
29
Average Liabilities and Equity [PIE CHART]
Customer Funds with Interest 77.3%
Customer Funds without Interest 11.4%
Debt and Equity 6.4%
Other Noninterest-Bearing 4.9%
ASSETS
State Street's assets consist primarily of short-term money market assets
and investment securities, which are generally more marketable than other types
of assets. Investment securities, principally classified as available-for-sale,
primarily include U.S. Treasury and Agency securities, highly-rated municipal
securities, asset-backed securities, and non-U.S. government bonds.
Interest-bearing deposits with banks are short-term, multicurrency instruments
invested with major multinational banks.
Average interest-earning assets increased $8.3 billion, or 17%, in 2000.
Securities purchased under resale agreements grew $2.9 billion, or 18%, from
1999, primarily from additional client funds. Total investment securities
increased $2.5 billion, or 20%, from 1999. Interest-bearing deposits with banks
increased 26% from 1999, to $16.4 billion. Loans decreased 20%, to
$5.4 billion, primarily due to the 1999 sale of the commercial banking business.
Average Assets
[PIE CHART]
Money Market and Investments 83.3%
Loans 8.6%
Other Assets 6.1%
Cash 2.0%
FAIR VALUE OF FINANCIAL INSTRUMENTS
The short duration of State Street's assets and liabilities results in the
fair value of its financial instruments equating to or closely approximating
their balance sheet value. For further discussion, see Note V to the
Consolidated Financial Statements included in Part I, Item 8, "Financial
Statements and Supplementary Data".
Further quantitative information on State Street's assets and liabilities is
furnished in the Supplemental Financial Data and Notes C-H to the Consolidated
Financial Statements included in Part I, Item 8, "Financial Statements and
Supplementary Data".
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, the sale of securities and payment of loans. Client deposits
and other funds provide a multicurrency, geographically diverse source of
liquidity.
State Street maintains a large portfolio of liquid assets. When liquidity is
measured by the ratio of liquid assets to total assets, State Street ranks among
the highest 10% of U.S. bank holding and financial holding companies. At
December 31, 2000, the Corporation's liquid assets were 86% of total assets.
In April 2000, State Street filed a universal shelf registration statement
that allows for the offering and sale of up to $1 billion of unsecured debt
securities, capital securities, common stock, depositary shares and preferred
stock, and warrants to purchase such securities, including any shares into which
the preferred stock and depositary shares may be convertible, or any combination
thereof. In June 2000, State Street issued $300 million in subordinated notes
due 2010. See Note H to the consolidated financial statements, included in
Part I, Item 8, "Financial Statements and Supplementary Data" for further
information. Additionally, State Street Bank has the ability to issue bank notes
with an aggregate limit of $750 million and with original maturities ranging
from 14 days to five years, and State Street Corporation has the ability to
issue commercial paper with an aggregate limit of $500 million and with original
maturities of up to 270 days from the date of issue.
State Street endeavors to maintain high ratings on its debt, as measured by
independent credit rating agencies. This minimizes borrowing costs and enhances
State Street's liquidity by ensuring the largest possible market for the
Corporation's debt. State Street's senior debt is rated AA- by Standard &
Poor's, Aa3 by Moody's Investors Service and AA by Fitch IBCA, Duff & Phelps.
State Street Bank's long-term certificates of deposit are rated AA by
Standard & Poor's, Aa2 by Moody's Investors Service and AA+ by Fitch IBCA,
Duff & Phelps.
The Consolidated Statement of Cash Flows to the Consolidated Financial
Statements included in Part I, Item 8, "Financial Statements and Supplementary
Data" provides additional information.
30
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.
As a state chartered bank and member of the Federal Reserve System, State
Street Bank and Trust Company, State Street's principal subsidiary, is regulated
by the Federal Reserve Board, which has established guidelines for minimum
capital ratios. State Street has developed internal capital adequacy policies to
ensure that State Street Bank meets or exceeds the level required for the "well
capitalized" category, the highest of the Federal Reserve Board's five capital
categories. State Street 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 simple asset levels; at 13.4%, State Street Bank's Tier 1 risk-based
capital ratio significantly exceeds the regulatory minimum of 4% and is among
the highest for U.S. banks. State Street's Tier 1 risk-based capital ratio of
14.5% is likewise among the highest for U.S. bank holding companies. For further
information, see Note K to the Consolidated Financial Statements included in
Part I, Item 8, "Financial Statements and Supplementary Data".
The Board of Directors has authorized the purchase of 16 million shares of
State Street common stock for use in employee benefit programs and for general
corporate purposes. State Street purchased 802,000 shares in 2000 as part of the
stock purchase program. As of December 31, 2000, 2.2 million shares remain
available for purchase within the program. Additionally, there were 20,000
shares acquired for other deferred compensation plans that are not part of the
stock purchase program. For further information, see Note I to the Consolidated
Financial Statements included in Part I, Item 8, "Financial Statements and
Supplementary Data".
DIVIDENDS AND COMMON STOCK
MARKET PRICE
DECLARED END OF
QUARTERS DIVIDENDS LOW HIGH QUARTER
-------- --------- -------- -------- ------------
1999:
First..................................................... $ .14 $ 67.00 $ 89.75 $ 82.25
Second.................................................... .15 74.06 95.25 85.38
Third..................................................... .15 55.50 87.56 64.63
Fourth.................................................... .16 58.63 78.44 73.06
2000:
First..................................................... .16 62.44 101.50 96.88
Second.................................................... .17 85.19 123.00 106.06
Third..................................................... .17 99.38 134.50 130.10
Fourth.................................................... .19 104.25 136.80 124.21
On December 21, 2000, State Street's Board of Directors approved a 2-for-1
stock split in the form of a 100% stock dividend, subject to the approval of an
increase in the authorized number of shares by stockholders at the Annual
Meeting in April 2001. Upon stockholder approval, the stock dividend would be
distributed on May 30, 2001 to stockholders of record as of April 30, 2001.
31
Consistent earnings growth has enabled State Street to increase its
quarterly dividend twice each year since 1978. Over the last fifteen years, the
dividend has grown at a 16% compound annual growth rate.
Dividends Per Share
Dollars
[BAR CHART]
1986 .09 thru 2000 .52 .60 .69
There were 5,623 stockholders of record as of December 31, 2000.
RISK MANAGEMENT
In providing services for institutional investors globally, State Street
must manage and control certain inherent risks. These include counterparty risk,
credit risk, fiduciary risk, operations and settlement risk, and market risk.
Risk management is an integral part of State Street's business activities and is
centrally organized with close ties to the business units. This structure allows
for corporate risk management across the business areas while individual line
areas remain responsible for risk management in their units.
Risk management emphasizes establishing specific authorization levels and
limits. Exposure levels are reviewed and modified as required by changing
conditions. Business-risk concentration analysis includes specific industry
credit risk concentrations, country limits and individual counterparty limits.
In managing country risk, State Street considers a variety of issues, including
those related to credit quality, asset concentration, liquidity and transfer
risk.
Credit risk results from the possibility that a loss may occur if a
counterparty becomes unable to meet the terms of a contract. State Street has
policies and procedures to monitor and manage all aspects of credit risk. These
include a comprehensive credit review and approval process that involves the
assignment of risk ratings to all loans and off-balance sheet credit exposures.
Rigorous credit approval processes cover traditional credit facilities, foreign
exchange, placements, credit-enhancement services, securities lending and
securities-clearing facilities.
Fiduciary risk is the risk of financial loss as a consequence of breaching a
fiduciary duty to a client. Business units are responsible for operating within
the rules and regulations applicable to their activities, including any
corporate guidelines. The Corporate Fiduciary Review Committee and the
Compliance Committee work with the business units to oversee adherence to
corporate standards.
State Street is a large servicer and manager of financial assets on a global
scale; therefore, oversight of operational and settlement risk is an integral
part of the management process throughout the Corporation. State Street focuses
on payment-system risk management, overdraft monitoring and control, and global
securities clearing and settlement. In addition to specific authorization levels
and limits, operational risk is mitigated by automation, standardized operating
procedures and insurance.
MARKET RISK: FOREIGN EXCHANGE AND INTEREST RATE SENSITIVITY
State Street engages in trading and investment activities to serve clients'
investment and trading needs, contribute to overall corporate earnings, and
enhance liquidity. In the conduct of these activities, the Corporation is
subject to, and assumes, market risk. Market risk is the risk of adverse
financial impact due to changes in market prices, such as interest rates and
foreign exchange rates. The level of risk State Street assumes is a function of
the Corporation's overall objectives and liquidity needs, client requirements,
and market volatility.
State Street manages its overall market risk through a comprehensive risk
management framework. This structure includes a market risk management group
that reports independently to senior management. Market risk from foreign
exchange and trading activities is controlled through established limits on
aggregate and net open positions, sensitivity to changes in interest rates, and
concentrations. These limits are supplemented by stop-loss thresholds. The
Corporation uses a variety of risk management tools and techniques, including
value at risk, to measure, monitor and control market risk. All limits and
measurement techniques are reviewed and adjusted as necessary on a regular basis
by business managers, the market risk management group and senior management.
State Street uses foreign exchange contracts and a variety of financial
derivative instruments to support clients' needs, conduct trading activities,
and manage its interest rate and currency risk. These activities are designed to
create trading revenue or hedge net interest revenue. In addition, the
Corporation provides services related to derivative instruments in its role as
both a manager and servicer of financial assets.
State Street's clients use derivatives to manage the financial risks
associated with their investment goals and business activities. With the growth
of cross-border investing, clients have an increasing need for foreign exchange
forward contracts to convert currency for international investment and to manage
the currency risk in international
32
investment portfolios. As an active participant in the foreign exchange markets,
State Street provides foreign exchange contracts and over-the-counter options in
support of these client needs.
TRADING ACTIVITIES: FOREIGN EXCHANGE AND INTEREST RATE SENSITIVITY
As part of its trading activities, the Corporation assumes positions in both
the foreign exchange and interest rate markets by buying and selling cash
instruments and using financial derivatives, including forward foreign exchange
contracts, foreign exchange and interest rate options, and interest rate swaps.
As of December 31, 2000, the notional amount of these derivative instruments was
$147.8 billion, of which $138.1 billion was foreign exchange forward contracts.
Long and short foreign exchange forward positions are closely matched to
minimize currency and interest rate risk. All foreign exchange contracts are
valued daily at current market rates.
The Corporation uses a variety of risk measurement and estimation
techniques, including value at risk. Value at risk is an estimate of potential
loss for a given period of time within a stated statistical confidence interval.
State Street uses a sophisticated risk management system, Askari
RiskBook,-Registered Trademark- to estimate value at risk daily for all material
trading positions. The Corporation has adopted standards for estimating value at
risk, and maintains capital for market risk, in accordance with the Federal
Reserve's Capital Adequacy Guidelines for market risk. Value at risk is
estimated for a 99% one-tail confidence interval and an assumed one-day holding
period using a historical observation period of greater than one year. A 99%
one-tail confidence interval implies that daily trading losses should not exceed
the estimated value at risk more than 1% of the time, or approximately three
days out of the year. The methodology uses a simulation approach based on
observed changes in interest rates and foreign exchange rates and takes into
account the resulting diversification benefits provided from the mix of the
Corporation's trading positions.
Like all quantitative risk measures, value at risk is subject to certain
limitations and assumptions inherent to the methodology. State Street's
methodology gives equal weight to all market rate observations regardless of how
recently the market rates were observed. The estimate is calculated using static
portfolios consisting of positions held at the end of the trading day. Implicit
in the estimate is the assumption that no intraday action is taken by management
during adverse market movements. As a result, the methodology does not represent
risk associated with intraday changes in positions or intraday price volatility.
The following table presents State Street's market risk for its trading
activities as measured by its value at risk methodology:
VALUE AT RISK FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN MILLIONS) AVERAGE MAXIMUM MINIMUM
--------------------- -------- -------- --------
2000:
Foreign exchange products................................... $ 1.0 $ 2.2 $ .4
Interest rate products...................................... 3.9 5.3 2.9
1999:
Foreign exchange products................................... 1.6 4.0 .6
Interest rate products...................................... 2.1 5.2
State Street compares actual daily profit and losses from trading activities
to estimated one-day value at risk. During 2000, State Street did not experience
any trading losses in excess of its end of day value at risk estimate.
NON-TRADING ACTIVITIES: CURRENCY RISK
State Street had $14.3 billion of non-U.S. dollar-denominated non-trading
assets as of December 31, 2000, which were funded by non-U.S. dollar-denominated
deposits. State Street's non-U.S. dollar-denominated non-trading assets
consisted of 45 currencies. Approximately 93% of these assets were in seven
major currencies. Since non-trading assets are generally invested in the same
currency in which the initial deposits are received, the risk associated with
changes to currency exchange rates is minimal. To the extent that deposits are
not reinvested in the same currency, the resulting net currency positions are
managed as part of the trading risk as discussed above.
In general, the maturities of these non-trading assets and liabilities are
short term. To the extent duration mismatches exist, they are managed as part of
State Street's consolidated asset/liability management activities, and the
related market risk is included in the following non-trading interest rate
sensitivity disclosure.
33
NON-TRADING ACTIVITIES: INTEREST RATE SENSITIVITY
The objective of interest rate sensitivity management is to provide
sustainable net interest revenue under various economic environments and to
protect asset values from adverse effects of changes in interest rates. State
Street manages the structure of interest-earning assets and interest-bearing
liabilities by adjusting the mix, yields, and maturity or repricing
characteristics, based on market conditions. Since interest-bearing sources of
funds are predominantly short-term, State Street maintains a generally
short-term structure for its interest-earning assets, including money market
assets, investments and loans. Off-balance sheet financial instruments,
including interest rate swaps, are used minimally as part of overall asset and
liability management to augment State Street's management of interest rate
exposure. State Street uses three tools for measuring interest rate risk:
simulation, duration, and gap analysis.
Key assumptions in the simulation, duration and gap models include the
timing of cash flows, maturity and repricing of financial instruments, changes
in market conditions, capital planning, and deposit sensitivity. These
assumptions are inherently uncertain and as a result, the models cannot
precisely estimate net interest revenue or precisely predict the impact of
changes in interest rates on net interest revenue and economic value. Actual
results may differ from simulated results due to the timing, magnitude and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors.
Simulation models facilitate the evaluation of the potential range of net
interest revenue under a "most likely" scenario, alternative interest rate
scenarios and rate shock tests. Based upon results of the simulation model as of
December 31, 2000, there would be a decrease in net interest revenue of
$36 million over the following 12 months for an immediate 100-basis-point
increase in interest rates. If interest rates immediately decreased by 100 basis
points, the model shows an increase in net interest revenue of less than
$1 million.
Duration measures the change in the economic value of assets and liabilities
for given changes in interest rates. Based upon the results of the duration
model as of December 31, 2000, there would be a decrease in the economic value
of assets, net of liabilities, of $3 million, or .004% of assets, as a result of
an immediate increase in interest rates of 100 basis points. In the event of an
immediate decrease of 100 basis points to interest rates, the model shows an
increase of $7 million, or .01% of assets, to the economic value of assets, net
of liabilities.
The third measure of interest rate risk, gap analysis, is the difference in
asset and liability repricing on a cumulative basis within a specified
timeframe. As of year-end 2000, interest-bearing liabilities reprice faster than
interest-earning assets over the next 12 months, as has been typical for State
Street. If all other variables remained constant, in the short term, falling
interest rates would lead to net interest revenue that is higher than it would
otherwise have been. Rising rates would lead to lower net interest revenue.
Other important determinants of net interest revenue are balance sheet size and
mix, interest rate spreads, the slope of the yield curve, and rate levels.
34
INTEREST SENSITIVITY POSITION AT DECEMBER 31, 2000
INTEREST SENSITIVITY PERIOD IN
MONTHS
------------------------------
(DOLLARS IN MILLIONS) BALANCE 0 TO 3 4 TO 6 7 TO 12 13 TO 24 25 TO 60 OVER 60
--------------------- -------- -------- -------- -------- -------- -------- --------
INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks........ $ 21,295 $ 18,752 $ 2,004 $ 539
Other money market assets(1)................ 17,556 17,556
Investment securities....................... 13,740 2,678 1,969 3,576 $ 1,818 $ 3,463 $ 236
Loans....................................... 3,692 1,696 127 59 6 43 1,761
-------- -------- ------- ------ ------- ------- ------
Total interest-earning assets............... 56,283 40,682 4,100 4,174 1,824 3,506 1,997
-------- -------- ------- ------ ------- ------- ------
INTEREST-BEARING LIABILITIES:
Domestic deposits........................... 2,241 2,127 6 4 104
Non-U.S. deposits........................... 25,687 25,677 7 3
Federal funds purchased and
repurchase agreements....................... 22,306 22,257 49
Other interest-bearing liabilities.......... 1,851 781 100 970
-------- -------- ------- ------ ------- ------- ------
Total interest-bearing liabilities.......... 52,085 50,842 62 7 204 970
-------- -------- ------- ------ ------- ------- ------
(10,160) 4,038 4,167 1,824 3,302 1,027
Interest rate swaps, net.................... 180 (30) (150)
-------- ------- ------ ------- ------- ------
Interest rate sensitivity position.......... (9,980) 4,038 4,167 1,794 3,302 877
-------- ------- ------ ------- ------- ------
Cumulative interest rate sensitivity
position.................................. (9,980) (5,942) (1,775) 19 3,321 4,198
Cumulative gap percentage(2)................ (16)% (9)% (3)% 0% 5% 7%
------------------------
(1) Includes adjustments to normalize the one-day position and for earnings
credits
(2) Cumulative interest rate sensitivity position as a percent of average total
interest-earning assets
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning quantitative and qualitative disclosures about market
risk appears in Part I, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation" under the caption "Risk
Management".
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------------- -------- -------- --------
Fee Revenue
Servicing fees.................................................. $ 1,424 $ 1,170 $ 1,024
Management fees................................................. 582 600 480
Foreign exchange trading........................................ 387 306 289
Processing fees--Note O......................................... 240 209 177
Other--Note O................................................... 32 (30) 27
------- ------- -------
TOTAL FEE REVENUE............................................... 2,665 2,255 1,997
Net Interest Revenue
Interest revenue................................................ 3,256 2,437 2,237
Interest expense................................................ 2,362 1,656 1,492
------- ------- -------
Net interest revenue--Note N.................................... 894 781 745
Provision for loan losses--Note D............................... 9 14 17
------- ------- -------
Net interest revenue after provision for loan losses............ 885 767 728
Gain on sale of commercial banking business, net of exit and other
associated costs.............................................. 282
------- ------- -------
TOTAL REVENUE................................................... 3,550 3,304 2,725
Operating Expenses
Salaries and employee benefits--Note P.......................... 1,524 1,313 1,175
Information systems and communications.......................... 305 287 241
Transaction processing services................................. 268 237 196
Occupancy....................................................... 201 188 164
Other--Note Q................................................... 346 311 292
------- ------- -------
Total operating expenses........................................ 2,644 2,336 2,068
------- ------- -------
Income before income taxes...................................... 906 968 657
Income taxes--Note R............................................ 311 349 221
------- ------- -------
NET INCOME...................................................... $ 595 $ 619 $ 436
======= ======= =======
Earnings Per Share--Note S
Basic........................................................... $ 3.70 $ 3.85 $ 2.71
Diluted......................................................... 3.63 3.78 2.66
Average Shares Outstanding (in thousands)
Basic........................................................... 160,839 160,660 160,937
Diluted......................................................... 164,044 163,751 163,927
----------------------------
The accompanying notes are an integral part of these financial
statements.
36
CONSOLIDATED STATEMENT OF CONDITION
AS OF DECEMBER 31,
(DOLLARS IN MILLIONS) 2000 1999
------------------------------------------------------------ -------- --------
Assets
Cash and due from banks--Note K............................. $ 1,618 $ 2,930
Interest-bearing deposits with banks........................ 21,295 16,902
Securities purchased under resale agreements
and securities borrowed--Note F........................... 21,134 17,518
Federal funds sold.......................................... 650 410
Trading account assets...................................... 1,004 786
Investment securities (principally
available-for-sale)--Notes C and F........................ 13,740 14,703
Loans (less allowance of $57 and $48)--Notes B and D........ 5,216 4,245
Premises and equipment--Notes E and H....................... 726 759
Accrued income receivable................................... 845 716
Other assets................................................ 3,070 1,927
------- -------
TOTAL ASSETS................................................ $69,298 $60,896
======= =======
Liabilities
DEPOSITS:
Interest-bearing--U.S....................................... $ 2,241 $ 1,917
Noninterest-bearing......................................... 10,009 8,943
Interest-bearing--Non-U.S................................... 25,687 23,285
------- -------
Total deposits.............................................. 37,937 34,145
Securities sold under repurchase agreements--Note F......... 21,351 18,399
Federal funds purchased..................................... 955 1,054
Other short-term borrowings--Note G......................... 632 1,104
Accrued taxes and other expenses--Note Q.................... 1,431 1,133
Other liabilities........................................... 2,511 1,488
Long-term debt--Note H...................................... 1,219 921
------- -------
TOTAL LIABILITIES........................................... 66,036 58,244
Stockholders' Equity--Notes H, I, J, K and S
Preferred stock, no par: authorized 3,500,000; issued none
Common stock, $1 par: authorized 250,000,000;
issued 167,219,000 and 167,225,000........................ 167 167
Surplus..................................................... 69 55
Retained earnings........................................... 3,278 2,795
Other unrealized comprehensive loss......................... (1) (57)
Treasury stock, at cost (5,508,000 and 7,635,000 shares).... (251) (308)
------- -------
TOTAL STOCKHOLDERS' EQUITY.................................. 3,262 2,652
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $69,298 $60,896
======= =======
------------------------
The accompanying notes are an integral part of these financial statements.
37
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK OTHER UNREALIZED TREASURY STOCK
(DOLLARS IN MILLIONS, EXCEPT PER ------------------- RETAINED COMPREHENSIVE -------------------
SHARE DATA, SHARES IN THOUSANDS) SHARES AMOUNT SURPLUS EARNINGS INCOME/(LOSS) SHARES AMOUNT TOTAL
-------------------------------- -------- -------- -------- -------- ---------------- -------- -------- --------
Balance at December 31, 1997...... 167,223 $167 $102 $1,920 $11 6,740 $(205) $1,995
COMPREHENSIVE INCOME:
Net Income........................ 436 436
Change in net unrealized gain/loss
on available for-sale
securities...................... 6 6
Foreign currency translation...... 5 5
------ --- ------
Comprehensive Income.............. 436 11 447
Cash dividends declared--$.52 a
share........................... (84) (84)
COMMON STOCK ISSUED PURSUANT TO:
Stock awards and options
exercised....................... 2 (37) (1,722) 88 51
Debt conversion................... (3) (144) 3
Other............................. 1 (30) 1 2
Common Stock acquired............. 1,716 (100) (100)
------- ---- ---- ------ --- ------ ----- ------
Balance at December 31, 1998...... 167,225 167 63 2,272 22 6,560 (213) 2,311
COMPREHENSIVE INCOME:
Net Income........................ 619 619
Change in net unrealized gain/loss
on available for-sale
securities...................... (70) (70)
Foreign currency translation...... (9) (9)
------ --- ------
Comprehensive Income.............. 619 (79) 540
Cash dividends declared--$.60 a
share........................... (96) (96)
COMMON STOCK ISSUED PURSUANT TO:
Stock awards and options
exercised....................... (7) (1,303) 67 60
Debt conversion................... (1) (47) 1
Common Stock acquired............. 2,425 (163) (163)
------- ---- ---- ------ --- ------ ----- ------
Balance at December 31, 1999...... 167,225 167 55 2,795 (57) 7,635 (308) 2,652
COMPREHENSIVE INCOME:
Net Income........................ 595 595
Change in net unrealized gain/loss
on available for-sale
securities...................... 66 66
Foreign currency translation...... (10) (10)
------ --- ------
Comprehensive Income.............. 595 56 651
Cash dividends declared--$.69 a
share........................... (112) (112)
COMMON STOCK ISSUED PURSUANT TO:
Stock awards and options
exercised....................... (6) 29 (2,547) 125 154
Debt conversion................... (15) (400) 16 1
Common Stock acquired............. 820 (84) (84)
------- ---- ---- ------ --- ------ ----- ------
BALANCE AT DECEMBER 31, 2000...... 167,219 $167 $ 69 $3,278 $(1) 5,508 $(251) $3,262
======= ==== ==== ====== === ====== ===== ======
The accompanying notes are an integral part of these financial statements.
38
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, 2000 1999 1998
--------------------------------------------- -------- -------- --------
Operating Activities
Net income.................................................. $ 595 $ 619 $ 436
Non-cash charges for depreciation, amortization, provision
for loan losses and deferred income taxes................. 383 341 345
------- -------- --------
Net income adjusted for non-cash charges.................... 978 960 781
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES:
Gain on sale of commercial banking businesses............... (282)
Securities (gains) losses, net.............................. (2) 45 (10)
Trading account assets, net................................. (218) (451) (130)
Other, net.................................................. (118) (77) 209
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 640 195 850
Investing Activities
PAYMENTS FOR PURCHASES OF:
Available-for-sale securities............................... (5,688) (16,175) (8,874)
Held-to-maturity securities................................. (987) (880) (2,481)
Lease financing assets...................................... (989) (610) (1,040)
Premises and equipment...................................... (247) (199) (258)
PROCEEDS FROM:
Sale of commercial banking businesses, net.................. 1,659
Maturities of available-for-sale securities................. 5,351 5,082 7,844
Maturities of held-to-maturity securities................... 933 790 2,193
Sales of available-for-sale securities...................... 1,464 6,066 1,945
Principal collected from lease financing.................... 37 87 86
NET PAYMENTS FOR:
Interest-bearing deposits with banks........................ (4,393) (4,817) (2,005)
Federal funds sold, resale agreements and securities
borrowed.................................................. (3,856) (3,949) (7,814)
Loans....................................................... (724) (217) (433)
------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES....................... (9,099) (13,163) (10,837)
------- -------- --------
Financing Activities
PROCEEDS FROM ISSUANCE OF:
Non-recourse debt for lease financing....................... 821 483 734
Long-term debt.............................................. 300 150
Treasury stock.............................................. 89 38 31
PAYMENTS FOR:
Non-recourse debt for lease financing....................... (45) (104) (106)
Maturity of notes payable................................... (44)
Long-term debt.............................................. (1) (1) (2)
Cash dividends.............................................. (106) (93) (84)
Purchase of common stock.................................... (84) (163) (100)
NET PROCEEDS FROM:
Deposits.................................................... 3,792 7,724 2,661
Short-term borrowings....................................... 2,381 6,649 5,701
------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 7,147 14,533 8,941
------- -------- --------
NET (DECREASE) INCREASE..................................... (1,312) 1,565 (1,046)
Cash and due from banks at beginning of year................ 2,930 1,365 2,411
------- -------- --------
CASH AND DUE FROM BANKS AT END OF YEAR...................... $ 1,618 $ 2,930 $ 1,365
======= ======== ========
The accompanying notes are an integral part of these financial statements.
39
NOTES TO FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
State Street Corporation ("State Street" or the "Corporation") is a
financial holding company that provides accounting, administration, custody,
daily pricing, investment management, securities lending, foreign exchange, cash
management, trading and information services to clients worldwide. State Street
reports two lines of business. Investment Services includes accounting,
administration, custody, daily pricing, operations outsourcing for investment
managers, securities lending, foreign exchange, record keeping, deposit and
short-term investment facilities, lease financing, and information services to
support institutional investors. Investment Management offers a broad array of
services for managing financial assets worldwide for both institutions and
individual investors. These services include passive and active equity, money
market, and fixed income strategies, and brokerage and other related services.
The accounting and reporting policies of State Street and its subsidiaries
conform to generally accepted accounting principles. Significant policies are
summarized below.
BASIS OF PRESENTATION
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"). Servicing and management fee revenue is
recognized when earned based on contractual terms. Transaction-based revenue is
recognized as the services are provided. Revenue on interest-earning assets is
recognized based on the effective yield of the financial instrument. All
significant intercompany balances and transactions have been eliminated upon
consolidation. The results of operations of businesses purchased are included
from the date of acquisition. Investments in affiliates in which the company has
the ability to exercise significant influence, but not control, are accounted
for using the equity method.
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Certain previously reported amounts have been reclassified to conform
to the current method of presentation.
For the Consolidated Statement of Cash Flows, State Street has defined cash
equivalents as those amounts included in the Consolidated Statement of Condition
caption, "Cash and due from banks." Interest paid in 2000, 1999 and 1998 was
$2.3 billion, $1.7 billion and $1.5 billion, respectively. Taxes paid in 2000,
1999 and 1998 were $132 million, $129 million and $107 million, respectively.
RESALE AND REPURCHASE AGREEMENTS; SECURITIES BORROWED
State Street purchases U.S. Treasury and federal agency securities ("U.S.
government securities") under agreements to resell the securities. These
purchases are recorded as securities purchased under resale agreements, an asset
in the Consolidated Statement of Condition. State Street can use these
securities as collateral for repurchase agreements. State Street's policy is to
take possession or control of the security underlying the resale agreement,
allowing borrowers the right of collateral substitution and/or short-notice
termination. The securities are revalued daily to determine if additional
collateral is necessary from the borrower. State Street enters into sales of
U.S. government securities under repurchase agreements, which are treated as
financings, and the obligations to repurchase such securities sold are reflected
as a liability in the Consolidated Statement of Condition. The dollar amount of
U.S. government securities underlying the repurchase agreements remains in
investment securities.
Securities borrowed are recorded at the amount of cash collateral deposited
with the lender. State Street monitors its market exposure daily with respect to
securities borrowed transactions. As necessary, State Street requests that
excess securities be returned or that additional securities be provided as
needed.
SECURITIES
Debt securities are held in both the investment and trading account
portfolios. Debt and marketable equity securities that are classified as
available for sale are reported at fair value, and the after-tax unrealized
gains and losses are reported in other comprehensive income, a component of
stockholders' equity. Securities classified as held to maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts. Gains or
losses on sales of available-for-sale securities are computed based on
identified costs and reported in fee revenue. Trading account
40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
assets are held in anticipation of short-term market movements and for resale to
customers. Trading account assets are carried at fair value with unrealized
gains and losses reported in fee revenue.
LOANS AND LEASE FINANCING
Loans are placed on a non-accrual basis when they become 60 days past due as
to either principal or interest, or when, in the opinion of management, full
collection of principal or interest is unlikely. When the loan is placed on
non-accrual, the accrual of interest is discontinued, and previously recorded
but unpaid interest is reversed and charged against current earnings.
Leveraged leases are carried net of nonrecourse debt. Revenue on leveraged
leases is recognized on a basis calculated to achieve a constant rate of return
on the outstanding investment in the leases, net of related deferred tax
liabilities, in the years in which the net investment is positive. Gains and
losses on residual values of leased equipment sold are included in other fee
revenue.
ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is evaluated on a regular
basis by management. Factors considered in evaluating the adequacy of the
allowance include previous loss experience, current economic conditions and
adverse situations that may affect the borrowers' ability to repay, timing of
future payments, estimated value of underlying collateral and the performance of
individual credits in relation to contract terms, and other relevant factors.
The provision for loan losses charged to earnings is based upon management's
judgment of the amount necessary to maintain the allowance at a level adequate
to absorb probable losses.
PREMISES AND EQUIPMENT
Buildings, leasehold improvements, computers, software and other equipment
are carried at cost less accumulated depreciation and amortization. Depreciation
and amortization charged to operating expenses are computed using the
straight-line method over the estimated useful life of the related asset or the
remaining term of the lease.
State Street's policy is to capitalize costs relating to internal-use
software development projects that provide significant functionality
enhancements. State Street considers projects for capitalization that are
expected to yield long-term operational benefits, such as replacement systems or
new applications that result in operational efficiencies and/or incremental
revenue streams. Software customization costs relating to specific customer
enhancements are expensed as incurred.
CURRENCY TRANSLATION
The assets and liabilities of non-U.S. operations are translated at
month-end exchange rates, and revenue and expenses are translated at average
monthly exchange rates. Gains or losses from the translation of the net assets
of certain non-U.S. subsidiaries, net of related taxes, are reported in other
comprehensive income. Gains or losses from other translations are included in
fee revenue.
DERIVATIVE FINANCIAL INSTRUMENTS
State Street uses three methods to account for derivative financial
instruments: the deferral method, accrual method and fair value method.
Interest rate swaps that are entered into as part of interest rate
management are accounted for using the accrual method. Interest receivable or
payable payments under the terms of the interest rate swap are accrued over the
period to which the payment relates. The interest payments accrued and any fees
paid at inception are recorded as an adjustment to the interest revenue or
interest expense of the underlying asset or liability.
Other interest rate contracts that are used for balance sheet management are
accounted for under the deferral method. The basis of the contract is
capitalized and any gain or loss is deferred and amortized over the life of the
hedged asset or liability as an adjustment to the interest revenue or interest
expense.
41
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A (CONTINUED)
The gross amount of unrealized gains and losses on foreign exchange and
interest rate contracts are reported separately at fair value on the balance
sheet as other assets and other liabilities, respectively, in the Consolidated
Statement of Condition, except where such gains and losses arise from contracts
covered by qualifying master netting agreements. Changes in fair value of these
contracts are recorded currently in earnings.
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," was issued in June 2000. This statement requires companies
to record the fair value of derivatives on the balance sheet as assets or
liabilities. Fair market valuation adjustments for derivatives meeting hedge
criteria will be recorded as either other comprehensive income, or through
earnings in the Consolidated Statement of Income, depending on their
classification. Derivatives used for trading purposes will continue to be marked
to market through earnings. State Street will adopt this statement beginning
January 1, 2001. The adoption of this statement will not have a material impact
on the financial statements. Based on the Corporation's derivative position at
December 31, 2000, management estimates the effect of the adoption of this
statement will be to record certain interest rate swaps as a cumulative change
in accounting principle in other comprehensive income.
INCOME TAXES
The provision for income taxes includes deferred income taxes arising as a
result of recognizing some items of revenue and expense in different years for
tax and financial reporting purposes.
EARNINGS PER SHARE
Basic earnings per share excludes all dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if stock options and stock award grants were
exercised. Diluted earnings per share also includes the assumption that all
convertible debt has been converted as of the beginning of each period.
COMPREHENSIVE INCOME
Changes in unrealized gains and losses on available-for-sale securities and
foreign currency translation, net of related deferred taxes, are recorded in
accumulated other comprehensive income in the Consolidated Statement of Changes
in Stockholders' Equity.
IMPACT OF OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," that
replaces, in its entirety, SFAS No. 125. SFAS No. 140 has changed many of the
rules regarding securitizations; however, it continues to require an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred, and to discontinue recognition of the financial assets when
control has been surrendered in accordance with the criteria provided. The new
rules will be applied prospectively to transactions beginning in the second
quarter of 2001. Management does not expect the adoption of this statement to
have a material impact to its financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," that provides guidance in
applying generally accepted accounting principles to revenue recognition in
financial statements. The application, effective October 1, 2000, did not have
an impact on the financial statements.
NOTE B
JOINT VENTURE AND DIVESTURE
In April 2000, State Street and Citigroup completed the formation of
CitiStreet, LLC, a 50/50 joint venture designed to service employee benefit
programs, accounted for using the equity method. State Street's contribution to
the joint venture consisted of its retirement investment and total benefits
outsourcing services, including the transfer of assets with a book value of
approximately $50 million.
On October 1, 1999, State Street completed the sale of its commercial
banking business. The commercial banking business consisted of a $2.4 billion
loan portfolio, a $36 million allowance for loan losses, and $1.1 billion in
deposits.
42
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B (CONTINUED)
The premium received on the sale was $350 million; exit costs were $57 million;
and other associated costs were $11 million, primarily consisting of provisions
for excess space and system impairment write-downs. The after-tax gain, net of
exit and other associated costs, totaled approximately $164 million, or $1.00 in
diluted earnings per share, and was recorded during the fourth quarter of 1999.
NOTE C
INVESTMENT SECURITIES
Available-for-sale securities are recorded at fair value and
held-to-maturity securities are recorded at amortized cost and consisted of the
following at December 31:
2000 1999
------------------------------------------ ------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED ------------------- FAIR AMORTIZED ------------------- FAIR
(DOLLARS IN MILLIONS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------------------- --------- -------- -------- -------- --------- -------- -------- --------
AVAILABLE FOR SALE:
U.S. Treasury and federal agencies...... $ 5,855 $24 $ 4 $ 5,875 $ 6,899 $2 $36 $ 6,865
State and political subdivisions........ 1,673 9 2 1,680 1,886 2 11 1,877
Asset-backed securities................. 3,273 11 4 3,280 3,261 1 25 3,237
Collateralized mortgage obligations..... 1,008 3 2 1,009 841 10 831
Other investments....................... 578 2 576 630 1 5 626
------- --- --- ------- ------- -- --- -------
TOTAL................................... $12,387 $47 $14 $12,420 $13,517 $6 $87 $13,436
======= === === ======= ======= == === =======
HELD TO MATURITY:
U.S. Treasury and federal agencies...... $ 1,272 $ 4 $ 1 $ 1,275 $ 1,219 $11 $ 1,208
Other investments....................... 48 48 48 48
------- --- --- ------- ------- -- --- -------
TOTAL................................... $ 1,320 $ 4 $ 1 $ 1,323 $ 1,267 $11 $ 1,256
======= === === ======= ======= == === =======
The maturity of asset-backed securities is based upon the expected principal
payments. Securities carried at $7.2 billion and $6.9 billion at December 31,
2000 and 1999, respectively, were designated as pledged securities for public
and trust deposits, borrowed funds and for other purposes as provided by law.
During 2000, there were gross gains of $3 million and gross losses of
$1 million realized on the sales of $1.5 billion of available-for-sale
securities. In 1999, there were gross gains of $13 million and gross losses of
$58 million realized on the sales of $6.1 billion of available-for-sale
securities. Included in the 1999 gross losses were $57 million of losses related
to the sale of $5.2 billion of investment securities as part of the
repositioning of State Street's investment securities portfolio in the fourth
quarter of 1999. During 1998 there were gross gains of $14 million and gross
losses of $4 million realized on the sale of $1.9 billion of available-for-sale
securities.
Following is the maturity information for available-for-sale and
held-to-maturity debt securities at December 31, 2000:
YEARS
-----------------------------------------
(DOLLARS IN MILLIONS) UNDER 1 1 TO 5 6 TO 10 OVER 10
--------------------- -------- -------- -------- --------
AVAILABLE FOR SALE:
Amortized cost.............................................. $6,991 $4,687 $343 $343
Fair value.................................................. 7,009 4,701 345 342
HELD TO MATURITY:
Amortized cost.............................................. 745 552 23
Fair value.................................................. 745 555 23
43
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D
LOANS
The loan portfolio consisted of the following at December 31:
(DOLLARS IN MILLIONS) 2000 1999
--------------------- -------- --------
COMMERCIAL AND FINANCIAL:
U.S......................................................... $2,570 $1,908
Non-U.S..................................................... 906 843
LEASE FINANCING:
U.S......................................................... 433 418
Non-U.S..................................................... 1,364 1,124
------ ------
Total loans................................................. 5,273 4,293
Less allowance for loan losses.............................. (57) (48)
------ ------
NET LOANS................................................... $5,216 $4,245
====== ======
Changes in the allowance for loan losses for the years ended December 31
were as follows:
(DOLLARS IN MILLIONS) 2000 1999 1998
--------------------- -------- -------- --------
Balance at beginning of year................................ $48 $84 $83
Provision for loan losses................................... 9 14 17
Loan charge-offs............................................ (1) (17) (19)
Recoveries.................................................. 1 3 3
Removed upon sale(1)........................................ (36)
--- --- ---
BALANCE AT END OF YEAR...................................... $57 $48 $84
=== === ===
------------------------
(1) On October 1, 1999, State Street completed the sale of its commercial
banking business, which included the sale of $2.4 billion of commercial,
financial and real estate loans, net of a $36 million allowance for loan
loss.
NOTE E
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
(DOLLARS IN MILLIONS) 2000 1999
--------------------- -------- --------
Buildings and land.......................................... $ 354 $ 344
Leasehold improvements...................................... 222 225
Computers and related equipment............................. 658 589
Software.................................................... 252 268
Other equipment............................................. 265 245
------ -----
1,751 1,671
Accumulated depreciation and amortization................... (1,025) (912)
------ -----
TOTAL PREMISES AND EQUIPMENT................................ $ 726 $ 759
====== =====
State Street has entered into noncancelable operating leases for premises
and equipment. At December 31, 2000, future minimum payments under noncancelable
operating leases with initial or remaining terms of one year or more totaled
$1.1 billion. This consisted of $129 million, $133 million, $105 million,
$86 million and $78 million for the years 2001 to 2005, respectively, and
$532 million thereafter. The minimum rental commitments have been reduced by
sublease rental commitments of $22 million. Nearly all leases include renewal
options.
44
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E (CONTINUED)
Total rental expense amounted to $111 million, $108 million and $95 million
in 2000, 1999 and 1998, respectively. Rental expense has been reduced by
sublease revenue of $2 million, $4 million and $4 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
NOTE F
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
State Street enters into sales of U.S. government securities under
repurchase agreements that are treated as financings, and the obligations to
repurchase such securities sold are reflected as a liability in the Consolidated
Statement of Condition. The dollar amount of U.S. government securities
underlying the repurchase agreements remains in investment securities.
Information on these U.S. government securities, and the related repurchase
agreements including accrued interest, is shown in the following table. This
table excludes repurchase agreements that are secured by securities purchased
under resale agreements and securities borrowed.
Information at December 31, 2000, was as follows:
REPURCHASE
U.S. GOVERNMENT SECURITIES SOLD AGREEMENTS
------------------------------- -------------------------
(DOLLARS IN MILLIONS) AMORTIZED COST FAIR VALUE AMORTIZED COST RATE
--------------------- -------------- -------------- -------------- --------
MATURITY OF REPURCHASE AGREEMENTS:
Overnight.................................................. $2,768 $2,775 $2,714 6.00%
2 to 30 days............................................... 137 138 135 5.26
31 to 90 days.............................................. 35 35 35 4.79
Over 90 days............................................... 32 32 31 5.27
------ ------ ------ ----
TOTAL...................................................... $2,972 $2,980 $2,915 5.94
====== ====== ====== ====
NOTE G
NOTES PAYABLE AND COMMERCIAL PAPER
State Street Bank has the ability to issue bank notes with an aggregate
limit of $750 million and with original maturities ranging from 14 days to five
years. State Street Corporation has the ability to issue commercial paper notes
with an aggregate limit of $500 million and with original maturities of up to
270 days from the date of issue. At December 31, 2000 and 1999, there were no
notes payable outstanding, and $467 million and $100 million in commercial paper
outstanding, respectively.
45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H
LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
(DOLLARS IN MILLIONS) 2000 1999
--------------------- -------- --------
CAPITAL SECURITIES:
8.035% Capital Securities B due 2027...................... $ 300 $ 300
7.94% Capital Securities A due 2026....................... 200 200
Floating Rate Capital Trust I due 2028.................... 150 150
7.65% Subordinated notes due 2010........................... 300
7.35% Notes due 2026........................................ 150 150
5.95% Notes due 2003........................................ 100 100
9.50% Mortgage note due 2009................................ 18 19
7.75% Convertible subordinated debentures due 2008.......... 1 2
------ ------
Total long-term debt........................................ $1,219 $ 921
====== ======
In April 2000, State Street filed a universal shelf registration statement
offering and sale of up to $1 billion of unsecured debt securities, capital
securities, common stock, depositary shares and preferred stock, and warrants to
purchase such securities, including any shares into which the preferred stock or
depositary shares may be convertible. On June 15, 2000, State Street issued
$300 million in subordinated notes due 2010 at a coupon rate of 7.65%. These
subordinated notes qualify as Tier 2 capital under federal regulatory
guidelines. At December 31, 2000, $700 million of the shelf registration was
available for issuance.
In connection with the sale of the floating rate capital securities issued
by Capital Trust I, State Street issued $150 million of floating rate junior
subordinated deferrable interest debentures to Capital Trust I due in May 2028.
Subsequent to that issuance, two interest rate swaps were entered into, to in
effect, modify the interest expense from a floating rate to a fixed rate of
6.58%.
State Street has established three statutory business trusts, which
collectively issued $650 million of cumulative semi-annual income and quarterly
income preferred securities ("capital securities"). The capital securities
qualify as Tier 1 capital under federal regulatory guidelines. The proceeds of
these issuances along with proceeds of related issuances of common securities of
the trusts, were invested in junior subordinated debentures ("debentures") of
State Street. The debentures are the sole assets of the trusts. State Street
owns all of the common securities of the trusts.
Payments to be made by the trusts on the capital securities are dependent on
payments that State Street has committed to make, particularly the payments to
be made by State Street on the debentures. Compliance by State Street would have
the effect of providing a full, irrevocable and unconditional guarantee of the
trusts' obligations under the capital securities.
Distributions on the capital securities are included in interest expense and
are payable from interest payments received on the debentures and are due
semi-annually for Capital Securities A and B and quarterly for Capital Trust I,
subject to deferral for up to five years under certain conditions. The capital
securities are subject to mandatory redemption in whole at the stated maturity
upon repayment of the debentures; with an option to redeem the debentures at any
time by State Street upon the occurrence of certain tax events or changes to tax
treatment, investment company regulation or capital treatment changes; or at any
time after March 15, 2007 for the Capital Securities B, after December 30, 2006
for the Capital Securities A and after May 15, 2008 for the Capital Trust I
securities.
For Capital Securities A and B, redemptions are based on declining
redemption prices according to the terms of the trust agreements. All
redemptions are subject to federal regulatory approval.
The 5.95% notes are unsecured obligations of State Street.
The 9.50% mortgage note was fully collateralized by property at
December 31, 2000. The scheduled principal payments for the next five years are
$2 million for each year 2001 through 2005.
46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H (CONTINUED)
The 7.75% debentures are convertible to common stock at a price of $2.875
per share, subject to adjustment for certain events. The debentures are
redeemable at par, at State Street's option. During 2000 and 1999, debentures
were converted into 400,000 and 47,000 shares of common stock, respectively. At
December 31, 2000, 346,000 shares of common stock had been reserved for issuance
upon conversion.
NOTE I
STOCKHOLDERS' EQUITY
State Street's Board of Directors has authorized the purchase of 16 million
shares of State Street common stock for use in employee benefit programs and for
general corporate purposes. State Street may also buy shares for other deferred
compensation plans that are not part of the stock purchase program. During 2000
and 1999, State Street purchased 821,000 and 2,425,000 shares of its common
stock, respectively, at an average cost of $103 and $67 per share, respectively.
As of December 31, 2000, cumulative shares purchased were 13,952,000, including
20,000 shares purchased for other deferred compensation plans that are not part
of the stock purchase program.
On December 21, 2000, State Street's Board of Directors approved a 2-for-1
stock split in the form of a 100% stock dividend, subject to the approval of an
increase in the authorized shares by stockholders at the Annual Meeting in
April 2001. Upon stockholder approval, the stock dividend would be distributed
on May 30, 2001 to stockholders of record as of April 30, 2001.
State Street has an Equity Incentive Plan with 15,900,000 shares of common
stock approved for issuance for stock and stock-based awards including stock
options, restricted and unrestricted stock, deferred stock, performance awards,
and stock appreciation rights. At December 31, 2000, 4,866,000 shares were
available for future awards under the 1997 Equity Incentive Plan. State Street
has stock options outstanding from previous plans under which no further grants
can be made.
Stock options can expire no longer than ten years from the date of grant and
the exercise price of nonqualified and incentive stock options may not be less
than the fair value of such shares at the date of grant. Information on stock
option activity starts with the table that follows.
State Street has a number of restricted stock programs. Programs vary by
restrictions, rights and vesting periods. In 2000 and 1999, 405,000 and 259,000
awards, net of cancellations, respectively, were granted. At December 31, 2000 a
total of 1,297,000 awards were outstanding under these programs.
Deferred stock awards vest over various time periods. In 2000 and 1999,
87,000 and 92,000 awards, net of cancellations, respectively, were granted. At
December 31, 2000, a total of 136,000 awards were outstanding.
Performance awards are earned over a performance period based on achievement
of goals. Payment for performance awards is made in cash equal to the fair
market value of State Street's common stock after the conclusion of each
performance period. During 2000 and 1999, 432,000 and 9,000 performance awards,
respectively, were granted.
Compensation related to restricted stock awards, deferred stock awards and
performance awards was $65 million, $35 million and $38 million for 2000, 1999
and 1998, respectively.
47
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I (CONTINUED)
Options outstanding and activity for the years ended December 31 consisted
of the following:
WEIGHTED
OPTION PRICE AVERAGE
(TOTAL DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA; SHARES IN THOUSANDS) PER SHARE OPTION PRICE SHARES TOTAL
----------------------------------------------------------------------- -------------------- ------------ -------- --------
December 31, 1997.......................................... $ 2.81-56.25 $25.92 6,944 $180
Granted.................................................... 52.44-69.53 67.80 2,242 152
Exercised.................................................. 2.81-52.44 15.47 (1,034) (16)
Canceled................................................... 3.51-68.31 36.70 (218) (8)
-------------------- ------ ------ ----
December 31, 1998.......................................... 2.81-69.53 38.79 7,934 308
Granted.................................................... 56.31-85.16 76.75 2,330 179
Exercised.................................................. 2.81-69.53 21.98 (1,026) (23)
Canceled................................................... 16.25-81.03 53.49 (306) (16)
-------------------- ------ ------ ----
December 31, 1999.......................................... 2.81-85.16 50.12 8,932 448
Granted.................................................... 67.31-121.48 111.12 2,597 288
Exercised.................................................. 2.81-81.03 30.09 (2,225) (67)
Canceled................................................... 16.25-118.78 70.33 (288) (20)
-------------------- ------ ------ ----
DECEMBER 31, 2000.......................................... 2.81-121.48 71.99 9,016 $649
==================== ====== ====== ====
The weighted average remaining contractual life of the nine million of the
stock options outstanding at December 31, 2000 is 7.8 years.
At December 31, 2000, 1999, and 1998 a total of 3,707,000, 3,714,000 and
2,617,000 shares under options, respectively, were exercisable.
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock option plan under APB Opinion 25
"Accounting for Stock Issued to Employees" and adopt the disclosure only
provisions of SFAS No. 123. Under APB 25, no compensation costs are recognized
because the option exercise price is equal to the fair market price of the
common stock on the date of the grant. Under SFAS No. 123, stock options are
valued at grant date using the Black-Scholes valuation model and compensation
costs are recognized pro rata over the vesting period. Had compensation costs
been determined as prescribed by SFAS No. 123, the Company's net income and
earnings per share would have been reduced to pro forma amounts indicated below.
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 2000 1999 1998
-------------------------------------------- -------- -------- --------
NET INCOME:
As reported................................................. $595 $619 $436
Pro forma................................................... 559 596 423
EARNINGS PER SHARE:
As reported................................................. 3.63 3.78 2.66
Pro forma................................................... 3.41 3.64 2.58
==== ==== ====
A Black-Scholes option pricing model was used for purposes of estimating the
fair value of State Street's employee stock options at the grant date. The
following are the weighted average assumptions for 2000, 1999 and 1998,
respectively: risk-free interest rates of 5.75%, 5.90% and 5.15%; dividend
yields of .73%, .92% and .86%; and volatility factors of the expected market
price of State Street common stock of .30, .30 and .29. The weighted average
life of the stock options granted is 4.1, 4.1 and 4.2 years for the years ended
December 31, 2000, 1999 and 1998, respectively.
NOTE J
SHAREHOLDERS' RIGHTS PLAN
In 1988, State Street declared a dividend of one preferred share purchase
right for each outstanding share of common stock. In 1998, the Rights Agreement
was amended and restated, whereby a right may be exercised, under
48
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE J (CONTINUED)
certain conditions, to purchase one four-hundredths share of a series of
participating preferred stock at an exercise price of $265, subject to
adjustment. The rights become exercisable if a party acquires or obtains the
right to acquire 10% or more of State Street's common stock or after
commencement or public announcement of an offer for 10% or more of State
Street's common stock. When exercisable, under certain conditions, each right
also entitles the holder thereof to purchase shares of common stock, of either
State Street or of the acquirer, having a market value of two times the then
current exercise price of that right.
The rights expire in September 2008, and may be redeemed at a price of
$.0025 per right, subject to adjustment, at any time prior to expiration or the
acquisition of 10% of State Street's common stock. Under certain circumstances,
the rights may be redeemed after they become exercisable and may be subject to
automatic redemption.
NOTE K
REGULATORY MATTERS
REGULATORY CAPITAL
State Street is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that, if undertaken, could have a direct material effect on State
Street's financial condition. Under capital adequacy guidelines, State Street
must meet specific capital guidelines that involve quantitative measures of
State Street's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. State Street's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require State Street and State Street Bank to maintain minimum risk-based and
leverage ratios as set forth in the table that follows. The risk-based capital
ratios are Tier 1 capital and Total capital to total adjusted risk-weighted
assets and market-risk equivalents, and the leverage ratio is Tier 1 capital to
quarterly average adjusted assets.
As of December 31, 2000, State Street Bank was categorized as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, State Street Bank must exceed the well
capitalized guideline ratios, as set forth in the table, and meet certain other
requirements. Management believes that State Street Bank exceeds all well
capitalized requirements, and there have been no conditions or events since
year-end that would change the status of well capitalized.
49
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K (CONTINUED)
The regulatory capital amounts and ratios were the following at
December 31:
REGULATORY GUIDELINES(1) STATE STREET STATE STREET BANK
------------------------- ------------------- -------------------
WELL
(DOLLARS IN MILLIONS) MINIMUM CAPITALIZED 2000 1999 2000 1999
--------------------- ----------- ----------- -------- -------- -------- --------
RISK-BASED RATIOS:
Tier 1 capital.................................. 4% 6% 14.5% 14.7% 13.4% 13.5%
Total capital................................... 8 10 15.6 14.7 13.5 13.7
Leverage ratio.................................. 3 5 5.4 5.6 5.3 5.7
TIER 1 CAPITAL.................................. $ 3,611 $ 3,119 $ 3,297 $ 2,841
TOTAL CAPITAL................................... 3,885 3,121 3,331 2,889
ADJUSTED RISK-WEIGHTED ASSETS AND MARKET-RISK
EQUIVALENTS:
On-balance sheet................................ $17,382 $15,293 $17,114 $15,108
Off-balance sheet............................... 6,930 5,451 6,935 5,464
Market-risk equivalent.......................... 629 475 598 454
------- ------- ------- -------
TOTAL........................................... $24,941 $21,219 $24,647 $21,026
======= ======= ======= =======
QUARTERLY AVERAGE ADJUSTED ASSETS............... $66,944 $55,274 $62,201 $50,158
======= ======= ======= =======
------------------------
(1) State Street must meet the regulatory designation of "well capitalized" in
order to maintain its status as a financial holding company. In addition,
Regulation Y defines "well capitalized" for a bank holding company such as
State Street for the purpose of determining eligibility for a streamlined
review process for acquisition proposals (for such purposes, "well
capitalized" requires State Street to maintain a minimum Tier 1 risk-based
capital ratio of 6% and a minimum total risk-based capital ratio of 10%).
CASH, DIVIDEND, LOAN AND OTHER RESTRICTIONS
During 2000, the subsidiary bank of State Street was required by the Federal
Reserve Bank to maintain average reserve balances of $136 million. Federal and
state banking regulations place certain restrictions on dividends paid by the
subsidiary bank to State Street. At December 31, 2000, State Street Bank had
$1.2 billion of retained earnings available for distribution to State Street in
the form of dividends.
The Federal Reserve Act requires that extensions of credit by State Street
Bank to certain affiliates, including State Street, be secured by specific
collateral, that the extension of credit to any one affiliate be limited to 10%
of capital and surplus (as defined), and that extensions of credit to all such
affiliates be limited to 20% of capital and surplus.
At December 31, 2000, consolidated retained earnings included $58 million
representing undistributed earnings of 50%-owned affiliates that are accounted
for using the equity method.
50
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE L
QUARTERLY RESULTS OF OPERATIONS, SHARE AND PER SHARE DATA (UNAUDITED)
The following is a tabulation of the unaudited quarterly results:
2000 QUARTERS 1999 QUARTERS
----------------------------------------- --------------------
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA) FOURTH THIRD SECOND FIRST FOURTH(1) THIRD
------------------------------------------------------- -------- -------- -------- -------- --------- --------
Fee revenue..... $648 $656 $656 $705 $ 557 $571
Interest revenue... 925 838 768 726 637 626
Interest expense... 692 603 553 514 442 428
---- ---- ---- ---- ------ ----
Net interest revenue... 233 235 215 212 195 198
Provision for loan losses... 1 3 2 3 2 4
---- ---- ---- ---- ------ ----
Net interest revenue after provision for loan losses... 232 232 213 209 193 194
Net gain on sale of the commercial banking business... 282
---- ---- ---- ---- ------ ----
Total revenue... 880 888 869 914 1,032 765
Operating expenses... 653 665 642 684 626 576
---- ---- ---- ---- ------ ----
Income before income taxes... 227 223 227 230 406 189
Income taxes.... 79 73 79 80 157 63
---- ---- ---- ---- ------ ----
NET INCOME...... $148 $150 $148 $150 $ 249 $126
==== ==== ==== ==== ====== ====
EARNINGS PER SHARE:
Basic........... $.92 $.93 $.92 $.94 $ 1.55 $.78
Diluted......... .90 .91 .90 .92 1.52 .77
AVERAGE SHARES OUTSTANDING:
Basic........... 161 161 161 160 160 161
Diluted......... 165 164 164 163 163 163
1999 QUARTERS
-------------------
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE DATA) SECOND FIRST
------------------------------------------------------- -------- --------
Fee revenue..... $575 $552
Interest revenue... 610 564
Interest expense... 416 370
---- ----
Net interest revenue... 194 194
Provision for loan losses... 4 4
---- ----
Net interest revenue after provision for loan losses... 190 190
Net gain on sale of the commercial banking business...
---- ----
Total revenue... 765 742
Operating expenses... 577 557
---- ----
Income before income taxes... 188 185
Income taxes.... 65 64
---- ----
NET INCOME...... $123 $121
==== ====
EARNINGS PER SHARE:
Basic........... $.77 $.75
Diluted......... .75 .74
AVERAGE SHARES OUTSTANDING:
Basic........... 161 161
Diluted......... 164 164
------------------------
(1) Results for the fourth quarter of 1999 included significant, non-recurring
special items for the gain of $282 million, net of exit and other associated
costs, on the sale of the commercial banking business and a one-time charge
of $57 million on sales of securities related to the repositioning of the
investment portfolio. Combined, these items increased net income by
$130 million, equal to $.81 basic and $.79 diluted earnings per share.
NOTE M
LINES OF BUSINESS
State Street reports two lines of business: Investment Services and
Investment Management. Historical operating results for the commercial banking
business, sold in 1999, are presented separately under the caption, "Business
Divestiture." The historical revenue and expenses of this business include
allocations of other items in accordance with existing methodologies for line of
business presentation.
State Street's significant products and services are presented within the
underlying operating results. Intersegment revenue consists of compensation for
deposit balances and other services.
Further financial information by line of business is contained within
Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Lines of Business". Significant
products and services offered by State Street are included in Part I, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "Fee Revenue".
51
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE M (CONTINUED)
The following is a summary of the lines of business operating results for
the years ended December 31:
INVESTMENT SERVICES INVESTMENT MANAGEMENT BUSINESS DIVESTITURE
------------------------------ ------------------------------ ---------------------
(DOLLARS IN MILLIONS; TAXABLE EQUIVALENT) 2000 1999(1) 1998 2000 1999(1) 1998 1999(1) 1998
----------------------------------------- -------- -------- -------- -------- -------- -------- --------- ---------
Total revenue............................ $2,838 $2,314 $2,109 $777 $717 $558 $88 $98
Income before income taxes............... 791 612 550 180 121 97 50 50
Average assets (billions)................ 61.2 51.2 42.8 1.7 1.1 .9 1.8 2.0
------------------------
(1) The 1999 results above do not include significant, non-recurring special
items for the gain on the sale of the commercial banking business of
$282 million, net of exit and other associated costs, and a one-time charge
of $57 million on sales of securities related to the repositioning of the
investment portfolio. Combined, and as presented in the Consolidated
Statement of Income, these non-recurring items increased total revenue and
income before income taxes by $225 million.
NOTE N
NET INTEREST REVENUE
Net interest revenue consisted of the following for the years ended
December 31:
(DOLLARS IN MILLIONS) 2000 1999 1998
--------------------- -------- -------- --------
Interest Revenue:
Deposits with banks......................................... $ 743 $ 497 $ 537
Investment securities:
U.S. Treasury and federal agencies........................ 520 399 313
State and political subdivisions (exempt from federal
tax).................................................... 84 71 77
Other investments......................................... 324 222 167
Loans....................................................... 292 405 400
Securities purchased under resale agreements, securities
borrowed and federal funds sold........................... 1,234 818 733
Trading account assets...................................... 59 25 10
------ ------ ------
Total interest revenue...................................... 3,256 2,437 2,237
------ ------ ------
Interest Expense:
Deposits.................................................... 1,012 712 656
Other borrowings............................................ 1,268 874 770
Long-term debt.............................................. 82 70 66
------ ------ ------
Total interest expense...................................... 2,362 1,656 1,492
------ ------ ------
NET INTEREST REVENUE........................................ $ 894 $ 781 $ 745
====== ====== ======
NOTE O
PROCESSING FEES AND OTHER FEE REVENUE
Processing fees of $240 million, $209 million and $177 million for the years
ended December 31, 2000, 1999 and 1998 included $95 million, $67 million and
$36 million, respectively, for brokerage services.
Other fee revenue includes gain and losses on sales of investment
securities, leased equipment and other assets, trading account profits and
losses, profits and losses from joint ventures, and amortization of investments
in tax-advantaged financings. In the fourth quarter of 1999, State Street
reported a one-time charge of $57 million on the sales of securities related to
the repositioning of the investment portfolio. This charge is included in other
fee revenue.
52
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE P
EMPLOYEE BENEFIT PLANS
State Street and certain of its subsidiaries participate in a
noncontributory defined benefit plan. In addition to the primary plan, State
Street has nonqualified supplemental plans that provide certain officers with
defined pension benefits in excess of allowable tax deductions. Non-U.S.
employees participate in local plans.
State Street Bank and certain subsidiaries participate in a post-retirement
plan that provides health care and insurance benefits for retired employees.
Combined information for the defined benefit plan, the nonqualified
supplemental plans and non-U.S. defined benefit plans, as well as the
post-retirement plan as of December 31 is as follows:
DEFINED BENEFIT POST-RETIREMENT
PLAN PLAN
------------------- -------------------
(DOLLARS IN MILLIONS) 2000 1999 2000 1999
--------------------- -------- -------- -------- --------
BENEFIT OBLIGATIONS:
Beginning of year........................................... $ 302 $ 287 $ 20 $ 21
Current service cost........................................ 26 27 1 1
Interest cost............................................... 23 19 1 1
Amendment and transfers in.................................. 11
Divestures.................................................. (1)
Actuarial losses (gains).................................... 21 (12) 1 (2)
Benefits paid............................................... (24) (30) (1) (1)
------ ------ ----- -----
END OF YEAR................................................. $ 347 $ 302 $ 22 $ 20
====== ====== ===== =====
PLAN ASSETS AT FAIR VALUE:
Beginning of year........................................... $ 260 $ 227
Actual return on plan assets................................ (4) 29
Contributions and transfers in.............................. 37 34
Benefits paid............................................... (24) (30)
------ ------ ----- -----
END OF YEAR................................................. $ 269 $ 260
====== ====== ===== =====
ACCRUED BENEFIT EXPENSE:
Underfunded status of the plans............................. $ 78 $ 42 $ 22 $ 20
Unrecognized net asset (obligation) at transition........... 6 8 (13) (14)
Unrecognized net (losses) gains............................. (69) (21) 12 13
Unrecognized prior service costs............................ (5) (7)
------ ------ ----- -----
TOTAL ACCRUED BENEFIT EXPENSE............................... $ 10 $ 22 $ 21 $ 19
====== ====== ===== =====
ACTUARIAL ASSUMPTIONS:
Discount rate used to determine benefit obligation.......... 8.00% 7.75% 8.00% 7.75%
Rate of increase for future compensation.................... 4.50 4.25
Expected long-term rate of return on assets................. 10.00 10.00
The assumed health care cost trend rate used in measuring the
post-retirement plan benefit obligation was 4.5%.
For those plans that have accumulated benefit obligations in excess of plan
assets as of December 31, 2000 and 1999, the aggregate benefit obligations are
$49 million and $71 million, respectively, the plan assets are $2 million and
$37 million, respectively, and the accumulated benefit obligations are
$36 million and $56 million, respectively.
If the health care cost trend rates were increased by 1%, the
post-retirement benefit obligation as of December 31, 2000, would have increased
5%, and the aggregate expense for service and interest costs for 2000 would have
increased by 7%. Conversely, if the health care cost trend rates were decreased
by 1%, the post-retirement benefit obligation as of December 31, 2000, would
have decreased 5%, and the aggregate expense for service and interest costs for
2000 would have decreased by 6%.
53
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE P (CONTINUED)
The following table sets forth the actuarially-determined expenses for State
Street's defined benefit and post-retirement plans for the years ended
December 31:
(DOLLARS IN MILLIONS) 2000 1999 1998
--------------------- -------- -------- --------
DEFINED BENEFIT PLANS:
Current service cost........................................ $ 26 $ 27 $ 20
Interest cost............................................... 23 19 17
Actual return on plan assets................................ (23) (21) (21)
Net amortization and deferral............................... 1 2
---- ---- ----
TOTAL EXPENSE............................................... $ 27 $ 27 $ 16
==== ==== ====
POST-RETIREMENT PLAN:
Service cost................................................ $ 1 $ 1 $ 1
Interest cost............................................... 1 1 1
Net amortization and deferral............................... 1 1
---- ---- ----
TOTAL EXPENSE............................................... $ 3 $ 3 $ 2
==== ==== ====
Employees of State Street and certain subsidiaries are eligible to
contribute a portion of their pre-tax salary to a 401(k) savings plan. State
Street matches a portion of these contributions, and the related expense for the
years ended December 31, was $16 million for 2000, $15 million for 1999 and
$11 million for 1998. Further, employees in certain non-U.S. offices participate
in other local plans. Expenses for these plans were $10 million, $7 million and
$8 million for 2000, 1999 and 1998, respectively.
NOTE Q
OPERATING EXPENSES--OTHER
The other category of operating expenses consisted of the following for the
years ended December 31:
(DOLLARS IN MILLIONS) 2000 1999 1998
--------------------- -------- -------- --------
Professional services....................................... $124 $117 $105
Advertising and sales promotion............................. 60 53 60
Other....................................................... 162 141 127
---- ---- ----
TOTAL OPERATING EXPENSES--OTHER............................. $346 $311 $292
==== ==== ====
54
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE R
INCOME TAXES
The provision for income taxes included in the Consolidated Statement of
Income consisted of the following for the years ended December 31:
(DOLLARS IN MILLIONS) 2000 1999 1998
--------------------- -------- -------- --------
CURRENT:
Federal..................................................... $ 67 $130 $ 42
State....................................................... 21 37 12
Non-U.S..................................................... 61 30 35
---- ---- ----
Total current............................................... 149 197 89
DEFERRED:
Federal..................................................... 135 111 93
State....................................................... 27 41 39
---- ---- ----
Total deferred.............................................. 162 152 132
---- ---- ----
TOTAL INCOME TAXES.......................................... $311 $349 $221
==== ==== ====
Income tax (expense) benefits related to net securities gains or losses was
$(1) million, $23 million and $(4) million for 2000, 1999 and 1998,
respectively. Current and deferred taxes for 1999 and 1998 have been
reclassified to reflect the tax returns as actually filed.
Income tax benefits (expense) reported in other comprehensive income in
stockholders' equity for the years ended December 31 are as follows:
(DOLLARS IN MILLIONS) 2000 1999 1998
--------------------- -------- -------- --------
Stock option exercises...................................... $ 61 $22 $24
Investment portfolio fair value adjustments................. (48) 48 4
Foreign currency translation................................ 4 6 (4)
Pre-tax income attributable to operations located outside the United States
was $181 million, $85 million and $80 million in 2000, 1999 and 1998,
respectively.
Significant components of the deferred tax liabilities and assets at
December 31 were as follows:
(DOLLARS IN MILLIONS) 2000 1999
--------------------- -------- --------
DEFERRED TAX LIABILITIES:
Lease financing transactions................................ $ 979 $797
Unrealized gain on available-for-sale securities............ 14
Other....................................................... 48 34
----- ----
Total deferred tax liabilities.............................. 1,041 831
DEFERRED TAX ASSETS:
Unrealized loss on available-for-sale securities............ 31
Operating expenses.......................................... 47 55
Deferred compensation....................................... 47 45
Allowance for loan losses................................... 23 21
Tax carryforwards........................................... 86 31
Depreciation, net........................................... 41 33
Other....................................................... 22 12
Valuation allowance......................................... (5) (3)
----- ----
Total deferred tax assets................................... 261 225
----- ----
NET DEFERRED TAX LIABILITIES................................ $ 780 $606
===== ====
55
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE R (CONTINUED)
At December 31, 2000, State Street had U.S. foreign tax credit carryforwards
of $58 million, minimum tax credit carryforwards of $18 million, non-U.S. tax
loss carryforwards of $6 million and general business credit carryforwards of
$4 million. U.S. foreign tax credit carryforwards of $8 million, $39 million and
$11 million will expire if not used by December 31, 2003, 2004 and 2005,
respectively. Non-U.S. tax losses of $2 million will expire in 2004. Remaining
tax losses carry forward indefinitely.
A reconciliation of the U.S. statutory income tax rate to the effective tax
rate based on income before taxes is as follows for the years ended
December 31:
2000 1999 1998
-------- -------- --------
U.S. federal income tax rate................................ 35.0% 35.0% 35.0%
CHANGES FROM STATUTORY RATE:
State taxes, net of federal benefit......................... 4.2 4.2 4.1
Tax-exempt interest revenue, net of disallowed interest..... (3.0) (2.9) (3.6)
Tax credits................................................. (2.7) (2.4) (2.6)
Other, net.................................................. .8 .2 .7
Special items(1)............................................ 2.0
---- ---- ----
EFFECTIVE TAX RATE.......................................... 34.3% 36.1% 33.6%
==== ==== ====
------------------------
(1) The adjustment for significant, non-recurring special items reported in 1999
above includes the increase in the effective tax rate resulting from the
gain on the sale of State Street's commercial banking business and the
one-time charge on the sales of securities related to the repositioning of
the investment portfolio. Accordingly, other changes from the statutory rate
are computed without regard to the gain and losses from special items
discussed above.
NOTE S
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the years ended December 31:
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 2000 1999 1998
-------------------------------------------- -------- -------- --------
Net Income.................................................. $ 595 $ 619 $ 436
EARNINGS PER SHARE:
Basic....................................................... $ 3.70 $ 3.85 $ 2.71
Diluted..................................................... 3.63 3.78 2.66
AVERAGE SHARES OUTSTANDING (THOUSANDS):
Basic average shares........................................ 160,839 160,660 160,937
EFFECT OF DILUTIVE SECURITIES:
Stock options and stock awards.............................. 2,640 2,319 2,133
7.75% convertible subordinated debentures................... 565 772 857
-------- -------- --------
Dilutive average shares..................................... 164,044 163,751 163,927
======== ======== ========
NOTE T
CONTINGENT LIABILITIES
State Street provides accounting, administration, custody, daily pricing,
investment management, securities lending, foreign exchange, cash management,
trading and information services 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
56
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE T (CONTINUED)
opinion of management, there are no contingent liabilities at December 31, 2000
that would have a material adverse effect on State Street's financial position
or results of operations.
State Street is subject to pending and threatened legal actions that arise
in the normal course of business. In the opinion of management, after discussion
with counsel, these actions can be successfully defended or resolved without a
material adverse effect on State Street's financial position or results of
operations.
NOTE U
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
An off-balance sheet derivative instrument is a contract or agreement whose
value is derived from interest rates, currency exchange rates or other financial
indices. Derivative instruments include forwards, futures, swaps, options and
other instruments with similar characteristics. The use of these instruments
generates fee or interest revenue.
Interest rate contracts involve an agreement with a counterparty to exchange
cash flows based on the movement of an underlying interest rate index. An
interest rate swap agreement involves the exchange of a series of interest
payments, either at a fixed or variable rate, based upon the notional amount
without the exchange of the underlying principal amount. An interest rate option
contract provides the purchaser, for a premium, the right, but not the
obligation, to buy or sell the underlying financial instrument at a set price at
or during a specified period. An interest rate futures contract is a commitment
to buy or sell, at a future date, a financial instrument at a contracted price;
it may be settled in cash or through the delivery of the contracted instrument.
Foreign exchange contracts involve an agreement to exchange the currency of
one country for the currency of another country at an agreed-upon rate and
settlement date. Foreign exchange contracts consist of swap agreements and
forward and spot contracts.
The following table summarizes the contractual or notional amounts of
derivative financial instruments held or issued for trading and balance sheet
management at December 31:
(DOLLARS IN MILLIONS) 2000 1999
--------------------- -------- --------
TRADING:
INTEREST RATE CONTRACTS:
Swap agreements............................................. $ 3,025 $ 1,986
Options and caps purchased.................................. 323 148
Options and caps written.................................... 413 279
Futures--short position..................................... 5,046 3,836
Options on futures purchased................................ 320 705
Options on futures written.................................. 460 900
FOREIGN EXCHANGE CONTRACTS:
Forward, swap and spot...................................... 138,057 122,795
Options purchased........................................... 2 187
Options written............................................. 2 205
BALANCE SHEET MANAGEMENT:
INTEREST RATE CONTRACTS:
Swap agreements............................................. 180 180
Options and caps purchased.................................. 30
State Street's risk exposure from interest rate and foreign exchange
contracts results from the possibility that one party may default on its
contractual obligation or from movements in exchange or interest rates. Credit
risk is limited to the positive market value of the derivative financial
instrument, which is significantly less than the notional value. The notional
value provides the basis for determining the exchange of contractual cash flows.
The exposure to credit loss can be estimated by calculating the cost, on a
present-value basis, to replace at current market rates all profitable contracts
at year end. The estimated aggregate replacement cost of derivative financial
instruments in a net positive position was $3.0 billion at December 31, 2000 and
$1.6 billion at December 31, 1999.
57
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE U (CONTINUED)
The foreign exchange contracts have been reduced by offsetting balances with
the same counterparty where a master netting agreement exists.
The following table represents the fair value as of December 31, and average
fair value for the years ended December 31, of financial instruments held or
issued for trading purposes:
AVERAGE
(DOLLARS IN MILLIONS) FAIR VALUE FAIR VALUE
--------------------- ---------- ----------
2000:
FOREIGN EXCHANGE CONTRACTS:
Contracts in a receivable position.......................... $2,124 $1,517
Contracts in a payable position............................. 2,097 1,464
OTHER FINANCIAL INSTRUMENT CONTRACTS:
Contracts in a receivable position.......................... 19 24
Contracts in a payable position............................. 37 16
1999:
FOREIGN EXCHANGE CONTRACTS:
Contracts in a receivable position.......................... $1,160 $1,222
Contracts in a payable position............................. 1,127 1,251
OTHER FINANCIAL INSTRUMENT CONTRACTS:
Contracts in a receivable position.......................... 40 19
Contracts in a payable position............................. 7 4
Net foreign exchange trading revenue related to foreign exchange contracts
totaled $387 million, $306 million and $289 million for 2000, 1999 and 1998,
respectively. For other financial instrument contracts, there was a loss of
$29 million in 2000, a gain of $14 million in 1999 and a loss of $6 million in
1998. Future cash requirements, if any, related to foreign currency contracts
are represented by the gross amount of currencies to be exchanged under each
contract unless State Street and the counterparty have agreed to pay or receive
the net contractual settlement amount on the settlement date. Future cash
requirements on other financial instruments are limited to the net amounts
payable under the agreements.
Credit-related financial instruments include indemnified securities on loan,
commitments to extend credit or purchase assets, standby letters of credit, and
letters of credit. The maximum credit risk associated with credit-related
financial instruments is measured by the contractual amounts of these
instruments.
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 $105.9 billion and $79.7 billion for indemnified securities on loan at
December 31, 2000 and 1999, respectively.
Loan commitments (unfunded loans and unused lines of credit), asset purchase
agreements, standby letters of credit and letters of credit are issued to
accommodate the financing needs of State Street's clients. Loan commitments are
agreements by State Street to lend monies at a future date. Asset purchase
agreements are commitments to purchase receivables or securities from a third
party, subject to conditions established in the agreement. Standby letters of
credit and letters of credit commit State Street to make payments on behalf of
clients when certain specified events occur.
These loan, asset purchase and letter of credit commitments are subject to
the same credit policies and reviews as loans. The amount and nature of
collateral is obtained based upon management's assessment of the credit risk.
Approximately 89% of the loan commitments and asset purchase agreements expire
within one year from the date of issue. Since many of the commitments are
expected to expire without being drawn, the total commitment amounts do not
necessarily represent future cash requirements.
58
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE U (CONTINUED)
The following is a summary of the contractual amount of credit-related,
off-balance sheet financial instruments at December 31:
(DOLLARS IN MILLIONS) 2000 1999
--------------------- -------- --------
Indemnified securities on loan.............................. $101,438 $77,352
Loan commitments............................................ 11,367 10,404
Asset purchase agreements................................... 7,112 3,585
Standby letters of credit................................... 4,028 3,128
Letters of credit........................................... 218 171
NOTE V
FAIR VALUE OF FINANCIAL INSTRUMENTS
State Street uses the following methods to estimate the fair value of
financial instruments.
For financial instruments that have quoted market prices, those quotes are
used to determine fair value. Financial instruments that have no defined
maturity, have a remaining maturity of 180 days or less, or reprice frequently
to a market rate are assumed to have a fair value that approximates reported
book value, after taking into consideration any applicable credit risk. If no
market quotes are available, financial instruments are valued by discounting the
expected cash flow(s) using an estimated current market interest rate for the
financial instrument. For off-balance sheet derivative instruments, fair value
is estimated as the amount that State Street would receive or pay to terminate
the contracts at the reporting date, taking into account the current unrealized
gains or losses on open contracts.
The short maturity of State Street's assets and liabilities results in
having a significant number of financial instruments whose fair value equals or
closely approximates reported balance sheet value. Such financial instruments
are reported in the following balance sheet captions: cash and due from banks,
interest-bearing deposits with banks, securities purchased under resale
agreements and securities borrowed, federal funds sold, deposits, securities
sold under repurchase agreements, federal funds purchased, and other short-term
borrowings. Fair value of trading accounts equals the carrying value. As of
December 31, 2000 and 1999, the fair value of interest rate contracts used for
balance sheet management were receivables of $5 million and $21 million,
respectively. There is no reported cost for loan commitments since terms are at
prevailing market rates.
The reported value and fair value for other balance sheet captions at
December 31 are as follows:
REPORTED FAIR
(DOLLARS IN MILLIONS) VALUE VALUE
--------------------- -------- --------
2000:
INVESTMENT SECURITIES:
Available for sale.......................................... $12,420 $12,420
Held to maturity............................................ 1,320 1,323
Net loans (excluding leases)................................ 3,419 3,419
Long-term debt.............................................. 1,219 1,392
1999:
INVESTMENT SECURITIES:
Available for sale.......................................... $13,436 $13,436
Held to maturity............................................ 1,267 1,256
Net loans (excluding leases)................................ 2,703 2,705
Long-term debt.............................................. 921 952
59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE W
NON-U.S. ACTIVITIES
Non-U.S. activities, as defined by the Securities and Exchange Commission,
are considered to be those revenue-producing assets and transactions that arise
from clients domiciled outside the United States.
Due to the nature of State Street's business, it is not possible to
segregate precisely U.S. and non-U.S. activities. The determination of earnings
attributable to non-U.S. activities requires internal allocations for resources
common to non-U.S. and U.S. activities. Subjective judgments have been used to
arrive at the operating results for non-U.S. activities. Interest expense
allocations are based on the average cost of short-term borrowed funds.
Allocations for operating expenses and certain administrative costs are
based on services provided and received.
The following table summarizes non-U.S. operating results for the years
ended December 31, and assets as of December 31, based on the domicile location
of clients:
(DOLLARS IN MILLIONS) 2000 1999 1998
--------------------- -------- -------- --------
Fee revenue................................................. $ 589 $ 469 $ 403
Interest revenue............................................ 949 680 675
Interest expense............................................ 648 418 430
------- ------- -------
Net interest revenue........................................ 301 262 245
Provision for loan losses................................... 2 4 4
------- ------- -------
Total revenue............................................... 888 727 644
Operating expenses.......................................... 629 531 473
------- ------- -------
Income before income taxes.................................. 259 196 171
Income taxes................................................ 102 76 61
------- ------- -------
Net Income.................................................. $ 157 $ 120 $ 110
======= ======= =======
Assets:
Interest-bearing deposits with banks........................ $21,295 $16,902 $12,085
Loans and other assets...................................... 3,709 4,610 2,761
------- ------- -------
TOTAL ASSETS................................................ $25,004 $21,512 $14,846
======= ======= =======
60
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE X
FINANCIAL STATEMENTS OF STATE STREET CORPORATION (PARENT ONLY)
STATEMENT OF INCOME
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, 2000 1999 1998
--------------------------------------------- -------- -------- --------
Interest on securities purchased under resale agreements.... $308 $210 $125
Cash dividends from bank subsidiary......................... 144 194 30
Cash dividends from nonbank subsidiaries.................... 6 5
Other, net.................................................. 37 22 11
---- ---- ----
Total revenue............................................... 495 431 166
Interest on securities sold under repurchase agreements..... 285 196 113
Other interest expense...................................... 94 70 66
Other expenses.............................................. 5 8 2
---- ---- ----
Total expenses.............................................. 384 274 181
Income tax expense (benefit)................................ 1 (5) (18)
---- ---- ----
Income before equity in undistributed income of subsidiaries
and affiliate............................................. 110 162 3
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES AND
AFFILIATE:
Consolidated bank subsidiary................................ 465 424 417
Consolidated nonbank subsidiaries and unconsolidated
affiliate................................................. 20 33 16
---- ---- ----
NET INCOME.................................................. $595 $619 $436
==== ==== ====
STATEMENT OF CONDITION
(DOLLARS IN MILLIONS) AS OF DECEMBER 31, 2000 1999
---------------------------------------- -------- --------
ASSETS:
Interest-bearing deposits with bank subsidiary.............. $ 351 $ 115
Securities purchased under resale agreements................ 5,234 5,240
Available-for-sale securities............................... 32 19
INVESTMENT IN SUBSIDIARIES:
Consolidated bank subsidiary................................ 3,583 3,009
Consolidated nonbank subsidiaries........................... 284 223
Unconsolidated affiliate.................................... 61 48
NOTES AND OTHER RECEIVABLES FROM:
Consolidated bank subsidiary................................ 57
Consolidated nonbank subsidiaries........................... 141 54
Other assets................................................ 66 77
------ ------
TOTAL ASSETS................................................ $9,809 $8,785
====== ======
LIABILITIES:
Securities sold under repurchase agreements................. $4,766 $5,061
Commercial paper............................................ 467 100
ACCRUED TAXES, EXPENSES AND OTHER LIABILITIES DUE TO:
Consolidated bank subsidiary................................ 8
Consolidated nonbank subsidiaries........................... 10 8
Others...................................................... 85 35
Long-term debt.............................................. 1,219 921
------ ------
Total Liabilities........................................... 6,547 6,133
------ ------
Stockholders' Equity........................................ 3,262 2,652
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $9,809 $8,785
====== ======
61
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE X (CONTINUED)
STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, 2000 1999 1998
--------------------------------------------- -------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............ $138 $ 157 $ (45)
INVESTING ACTIVITIES:
NET (PAYMENTS FOR) PROCEEDS FROM:
Investments in nonbank subsidiaries......................... (39) (76) (13)
Securities purchased under resale agreements................ 6 (1,683) (3,237)
Purchase of available-for-sale securities................... (24) (3) (39)
Interest-bearing deposits with banks........................ 75 (75)
Interest-bearing deposits with bank subsidiary.............. (236) (69) (45)
Notes receivable from subsidiaries.......................... (111) 65 (25)
Other....................................................... 10 36 19
---- ------ ------
NET CASH USED BY INVESTING ACTIVITIES....................... (394) (1,655) (3,415)
FINANCING ACTIVITIES:
Net proceeds from commercial paper.......................... 352 100
Proceeds from issuance of long-term debt.................... 300 153
Proceeds from issuance of common and treasury stock......... 89 38 31
Payments for cash dividends................................. (106) (93) (84)
Payments for purchase of common stock....................... (84) (163) (100)
Net (payments for) proceeds from short term borrowing....... (295) 1,616 3,445
---- ------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 256 1,498 3,445
---- ------ ------
NET CHANGE.................................................. (15)
Cash and due from banks at beginning of year................ 15
---- ------ ------
CASH AND DUE FROM BANKS AT END OF YEAR...................... $ 0 $ 0 $ 0
==== ====== ======
NOTE Y
SUBSEQUENT EVENT
At December 31, 2000, State Street held a $50 million investment in Bridge
Information Systems (Bridge). On February 6, 2001, State Street announced that
it is closely monitoring Bridge's announced proposal to implement
recapitalization by filing a Prepackaged Plan of Reorganization under
Chapter 11 of the United States Bankruptcy Code.
62
REPORT OF INDEPENDENT AUDITORS
THE STOCKHOLDERS AND BOARD OF DIRECTORS
STATE STREET CORPORATION
We have audited the accompanying consolidated statements of condition of
State Street Corporation as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of State Street
Corporation at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 17, 2001
except for Note Y, as to which the date is
February 6, 2001
63
SUPPLEMENTAL FINANCIAL DATA
CONDENSED AVERAGE STATEMENT OF CONDITION WITH NET INTEREST REVENUE ANALYSIS
2000 1999 1998
------------------------------ ------------------------------ --------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN MILLIONS; TAXABLE EQUIVALENT) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE
----------------------------------------- -------- -------- -------- -------- -------- -------- --------
ASSETS
Interest-bearing deposits with banks......... $16,399 $ 743 4.53% $13,043 $ 497 3.81% $11,271
Securities purchased under resale agreements
and securities borrowed.................... 18,531 1,159 6.26 15,663 786 5.02 12,876
Federal funds sold........................... 1,186 75 6.30 652 32 4.95 762
Trading account assets....................... 1,083 54 4.99 645 24 3.68 268
INVESTMENT SECURITIES:
U.S. Treasury and federal agencies........... 8,308 520 6.26 7,230 399 5.51 5,337
State and political subdivisions............. 1,932 133 6.91 1,691 102 6.05 1,729
Other investments............................ 4,954 324 6.54 3,780 222 5.89 2,816
------- ------ ---- ------- ------ ---- -------
Total investment securities.................. 15,194 977 6.43 12,701 723 5.69 9,882
LOANS:
Commercial and financial..................... 2,895 129 4.47 4,173 230 5.51 4,175
Real estate.................................. 66 5 7.96 73
Non-U.S...................................... 890 56 6.32 1,138 62 5.46 970
Lease financing, U.S. and Non-U.S............ 1,659 128 7.69 1,408 118 8.32 1,129
------- ------ ---- ------- ------ ---- -------
Total loans.................................. 5,444 313 5.75 6,785 415 6.11 6,347
------- ------ ---- ------- ------ ---- -------
Total Interest-Earning Assets................ 57,837 3,321 5.74 49,489 2,477 5.00 41,406
Cash and due from banks...................... 1,267 1,244 926
Allowance for loan losses.................... (53) (81) (90)
Premises and equipment....................... 718 747 633
Other assets................................. 3,154 2,696 2,835
------- ------- -------
TOTAL ASSETS................................. $62,923 $54,095 $45,710
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING DEPOSITS:
U.S.......................................... $ 2,779 153 5.51 $ 3,178 129 4.06 $ 2,635
Non-U.S...................................... 24,615 859 3.48 20,098 583 2.90 16,294
------- ------ ---- ------- ------ ---- -------
Total interest-bearing deposits.............. 27,394 1,012 3.69 23,276 712 3.06 18,929
Securities sold under repurchase
agreements................................. 19,867 1,182 5.95 16,988 810 4.77 13,775
Federal funds purchased...................... 729 46 6.33 842 41 4.90 704
Other short-term borrowings.................. 673 40 6.04 508 23 4.62 619
Notes payable................................ 4
Long-term debt............................... 1,080 82 7.62 922 70 7.63 867
------- ------ ---- ------- ------ ---- -------
TOTAL INTEREST-BEARING LIABILITIES........... 49,743 2,362 4.75 42,536 1,656 3.89 34,898
Noninterest-bearing deposits................. 7,198 6,527 6,254
Other liabilities............................ 3,052 2,553 2,401
Stockholders' equity......................... 2,930 2,479 2,157
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $62,923 $54,095 $45,710
======= ======= =======
Net interest revenue......................... $ 959 $ 821
====== ======
Excess of rate earned over rate paid......... .99% 1.11%
==== ====
Net Interest Margin(1)....................... 1.66% 1.66%
==== ====
1998 1997 1996
------------------- ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN MILLIONS; TAXABLE EQUIVALENT) INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
ASSETS
Interest-bearing deposits with banks......... $ 537 4.76% $ 8,516 $ 415 4.88% $ 7,041 $ 336 4.78%
Securities purchased under resale agreements
and securities borrowed.................... 691 5.37 6,413 354 5.52 6,010 326 5.43
Federal funds sold........................... 42 5.46 708 39 5.57 561 30 5.35
Trading account assets....................... 10 3.61 153 9 5.60 326 18 5.41
INVESTMENT SECURITIES:
U.S. Treasury and federal agencies........... 313 5.88 5,980 360 6.03 4,319 261 6.03
State and political subdivisions............. 105 6.08 1,645 105 6.37 1,478 92 6.25
Other investments............................ 170 6.03 2,659 163 6.12 2,111 127 6.01
----- ---- ------- ----- ---- ------- ----- ----
Total investment securities.................. 588 5.95 10,284 628 6.11 7,908 480 6.06
LOANS:
Commercial and financial..................... 248 5.93 3,494 215 6.15 2,938 185 6.30
Real estate.................................. 6 8.55 99 9 8.72 106 9 8.76
Non-U.S...................................... 62 6.37 882 61 6.98 815 52 6.40
Lease financing, U.S. and Non-U.S............ 93 8.29 876 69 7.86 654 44 6.73
----- ---- ------- ----- ---- ------- ----- ----
Total loans.................................. 409 6.45 5,351 354 6.61 4,513 290 6.42
----- ---- ------- ----- ---- ------- ----- ----
Total Interest-Earning Assets................ 2,277 5.50 31,425 1,799 5.73 26,359 1,480 5.61
Cash and due from banks...................... 1,119 1,164
Allowance for loan losses.................... (76) (70)
Premises and equipment....................... 475 458
Other assets................................. 2,483 1,572
------- -------
TOTAL ASSETS................................. $35,426 $29,483
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING DEPOSITS:
U.S.......................................... 115 4.38 $ 2,234 95 4.23 $ 2,247 94 4.18
Non-U.S...................................... 542 3.33 12,645 417 3.30 10,372 331 3.19
----- ---- ------- ----- ---- ------- ----- ----
Total interest-bearing deposits.............. 657 3.47 14,879 512 3.44 12,619 425 3.37
Securities sold under repurchase
agreements................................. 703 5.11 9,598 499 5.20 7,819 394 5.05
Federal funds purchased...................... 37 5.28 291 15 5.26 357 19 5.18
Other short-term borrowings.................. 29 4.66 602 30 5.03 707 36 5.04
Notes payable................................ 6.40 76 3 4.34 124 3 2.47
Long-term debt............................... 66 7.62 717 55 7.70 213 15 6.95
----- ---- ------- ----- ---- ------- ----- ----
TOTAL INTEREST-BEARING LIABILITIES........... 1,492 4.28 26,163 1,114 4.26 21,839 892 4.08
Noninterest-bearing deposits................. 5,288 4,638
Other liabilities............................ 2,128 1,388
Stockholders' equity......................... 1,847 1,618
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $35,426 $29,483
======= =======
Net interest revenue......................... $ 785 $ 685 $ 588
===== ===== =====
Excess of rate earned over rate paid......... 1.22% 1.47% 1.53%
==== ==== ====
Net Interest Margin(1)....................... 1.90% 2.18% 2.23%
==== ==== ====
------------------------------
(1) Net interest margin is taxable equivalent net interest revenue divided by
average interest-earning assets.
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning State Street's directors will appear in State
Street's Proxy Statement for the 2001 Annual Meeting of Stockholders, to be
filed pursuant to Regulation 14A on or before April 30, 2001, under the caption
"Election of Directors". Such information is incorporated herein by reference.
Information concerning State Street's executive officers appears under the
caption "Executive Officers of the Registrant" in Item 4.A of this Report.
Information concerning compliance with Section 16(a) of the Securities
Exchange Act will appear in State Street's Proxy Statement for the 2001 Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A on or before
April 30, 2001, under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance". Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item will appear in State Street's Proxy
Statement for the 2001 Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A on or before April 30, 2001, under the captions "Executive
Compensation", "Compensation of Directors", "Retirement Benefits", "General
Information--Executive Compensation Committee", "Report of the Executive
Compensation Committee", and "Stockholder Return Performance Presentation". Such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management will appear in State Street's Proxy Statement for the 2001 Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A on or before
April 30, 2001, under the caption "Beneficial Ownership of Shares". Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions will
appear in State Street's Proxy Statement for the 2001 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A on or before April 30,
2001, under the caption "Certain Transactions". Such information is incorporated
herein by reference.
65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of State Street are included
in Item 8 hereof:
Consolidated Statement of Income--Years ended December 31, 2000, 1999 and
1998
Consolidated Statement of Condition--December 31, 2000 and 1999
Consolidated Statement of Changes in Stockholders' Equity--Years ended
December 31, 2000, 1999 and 1998
Consolidated Statement of Cash Flows--Years ended December 31, 2000, 1999
and 1998
Notes to Financial Statements
Report of Independent Auditors
(2) FINANCIAL STATEMENT SCHEDULES
Certain schedules to the consolidated financial statements have been omitted
if they were not required by Article 9 of Regulation S-X or if, under the
related instructions, they were inapplicable, or the information was contained
elsewhere herein.
(3) EXHIBITS
A list of the exhibits filed or incorporated by reference is as follows:
3.1 Restated Articles of Organization, as amended (filed with
the Securities and Exchange Commission as Exhibit 3.1 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated by reference)
3.2 By-laws, as amended (filed with the Securities and Exchange
Commission as Exhibit 3.2 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991 and
incorporated by reference)
4.1 The description of Registrant Common Stock is included in
Registrant's Registration Statement on Form 10, as filed
with the Securities and Exchange Commission on September 3,
1970 and amended as filed with the Securities and Exchange
Commission on May 12, 1971 and incorporated by reference
4.2 Amended and Restated Rights Agreement dated as of June 18,
1998 between Registrant and BankBoston, N.A., Rights Agent
(filed with the Securities and Exchange Commission as
Exhibit 99.1 to Registrant's Current Report on Form 8-K
dated June18, 1998 and incorporated by reference)
4.3 Indenture dated as of May 1, 1983 between Registrant and
Morgan Guaranty Trust Company of New York, Trustee, relating
to Registrant's 7 3/4% Convertible Subordinated Debentures
due 2008 (filed with the Securities and Exchange Commission
as Exhibit 4 to Registrant's Registration Statement on Form
S-3 (Commission File No. 2-83251) and incorporated by
reference)
4.4 Indenture dated as of August 2, 1993 between Registrant and
The First National Bank of Boston, as trustee relating to
Registrant's long-term notes (filed with the Securities and
Exchange Commission as Exhibit 4 to the Registrant's Current
Report on Form 8-K dated October 8, 1993 and incorporated by
reference)
4.5 Instrument of Resignation, Appointment, and Acceptance,
dated as of February 14, 1996 among Registrant, The First
National Bank of Boston (resigning trustee) and Fleet
National Bank of Massachusetts (successor trustee) (filed
with the Securities and Exchange Commission as Exhibit 4.6
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated by reference)
4.6 Instrument of Resignation, Appointment and Acceptance dated
as of June 26, 1997 among Registrant, Fleet National Bank
(resigning trustee) and First Trust National Association
(successor trustee) (filed with the Securities and Exchange
Commission as Exhibit 4.13 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997 and
incorporated by reference)
4.7 Junior Subordinated Indenture dated as of December 15, 1996
between Registrant and the First National Bank of Chicago
(filed with the Securities and Exchange Commission as
Exhibit 1 to Registrant's Current Report on Form 8-K dated
December 20, 1996 and incorporated by reference)
66
4.8 Amended and Restated Trust Agreement dated as of December
15, 1996 relating to State Street Institutional Capital A
(filed with the Securities and Exchange Commission as
Exhibit 2 to Registrant's Current Report on Form 8-K dated
December 20, 1996 and incorporated by reference)
4.9 Capital Securities Guarantee Agreement dated as of December
15, 1996 between Registrant and the First National Bank of
Chicago (filed with the Securities and Exchange Commission
as Exhibit 3 to Registrant's Current Report on Form 8-K
dated December 20, 1996 and incorporated by reference)
4.10 Amended and Restated Trust Agreement, dated as of March 11,
1997 relating to State Street Institutional Capital B (filed
with the Securities and Exchange Commission as Exhibit 2 to
the Registrant's Current Report on Form 8-K dated March 11,
1997 and incorporated by reference)
4.11 Capital Securities Guarantee Agreement dated as of March 11,
1997 between Registrant and the First National Bank of
Chicago (filed with the Securities and Exchange Commission
as Exhibit 3 to Registrant's Current Report on Form 8-K
dated March 11, 1997 and incorporated by reference)
4.12 (Note: Registrant agrees to furnish to the Securities and
Exchange Commission upon request a copy of any other
instrument with respect to long-term debt of the Registrant
and its subsidiaries. Such other instruments are not filed
herewith since no such instrument relates to outstanding
debt in an amount greater than 10% of the total assets of
Registrant and its subsidiaries on a consolidated basis.)
10.1 Registrant's 1984 Stock Option Plan, as amended (filed with
the Securities and Exchange Commission as Exhibit 4(a) to
Registrant's Registration Statement on Form S-8 (File No.
2-93157) and incorporated by reference)
10.2 Registrant's 1985 Stock Option and Performance Share Plan,
as amended (filed with the Securities and Exchange
Commission as Exhibit 10.1 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1985 and
incorporated by reference)
10.3 Registrant's 1989 Stock Option Plan, as amended (filed with
the Securities and Exchange Commission as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989 and incorporated by reference)
10.4 Registrant's 1990 Stock Option and Performance Share Plan,
as amended (filed with the Securities and Exchange
Commission as Exhibit 10.1 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990 and
incorporated by reference)
10.5 Registrant's Supplemental Executive Retirement Plan,
together with individual benefit agreements (filed with the
Securities and Exchange Commission as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated by reference)
10.5A Amendment No. 1 dated as of October 19, 1995, to
Registrant's Supplemental Executive Retirement Plan (filed
with the Securities and Exchange Commission as Exhibit 10.6A
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated by reference)
10.6 Individual Pension Agreement with Marshall N. Carter (filed
with the Securities and Exchange Commission as Exhibit 10.10
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991 and incorporated by reference)
10.6A Revised Termination Benefits Arrangement with Marshall N.
Carter (filed with the Securities and Exchange Commission as
Exhibit 10.10 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated by
reference)
10.7 Registrant's 1994 Stock Option and Performance Unit Plan
(filed with the Securities and Exchange Commission as
Exhibit 10.17 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993 and incorporated by
reference)
10.7A Amendment No. 1 dated as of October 19, 1995 to Registrant's
1994 Stock Option and Performance Unit Plan (filed with the
Securities and Exchange Commission as Exhibit 10.13A to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated by reference)
10.7B Amendment No. 2 dated as of June 20, 1996 to Registrant's
1994 Stock Option and Performance Unit Plan (filed with the
Securities and Exchange Commission as Exhibit 10.7B to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated by reference)
67
10.7C Amendment No. 3 dated as of June 28, 2000 to Registrant's
1994 Stock Option and Performance Unit Plan, as amended
(filed with the Securities and Exchange Commission as
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 and incorporated by
reference)
10.8 Registrant's Amended and Restated Supplemental Defined
Benefit Pension Plan for Senior Executive Officers (filed
with the Securities and Exchange Commission as Exhibit 10 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 and incorporated by reference)
10.9 Registrant's Non-employee Director Retirement Plan (filed
with the Securities and Exchange Commission as Exhibit 10.22
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated by reference)
10.10 State Street Global Advisors Incentive Plan for 1996 (filed
with the Securities and Exchange Commission as Exhibit 10.19
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated by reference)
10.11 Forms of Employment Agreement with Officers (Levels 1, 2,
and 3) approved by the Board of Directors on September, 1995
(filed with the Securities and Exchange Commission as
Exhibit 10.20 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated by
reference)
10.12 State Street Global Advisors Equity Compensation Plan (filed
with the Securities and Exchange Commission as Exhibit 10 to
the Registrant's Form 10-Q for the quarter ended September
30, 1996 and incorporated by reference)
10.13 Registrant's Senior Executive Annual Incentive Plan (filed
with the Securities and Exchange Commission as Exhibit 10.17
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated by reference)
10.14 Registrant's Executive Compensation Trust Agreement dated
December 6, 1996 (Rabbi Trust) (filed with the Securities
and Exchange Commission as Exhibit 10.18 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated by reference)
10.15 Registrant's 1997 Equity Incentive Plan, as amended (filed
with the Securities and Exchange Commission as Exhibit 10.22
to Registrant's Form 10-Q for the quarter ended June 30,
1997 and incorporated by reference)
10.15A Amendment No. 2 to Registrant's 1997 Equity Incentive Plan
(filed with the Securities and Exchange Commission as
Exhibit 10.17 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated by
reference)
10.15B Amendment No. 3 dated as of April 24, 2000 to Registrant's
1997 Equity Incentive Plan, as amended (filed with the
Securities and Exchange Commission as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000 and incorporated by reference)
10.15C Amendment No. 4 dated as of June 28, 2000 to Registrant's
1997 Equity Incentive Plan, as amended (filed with the
Securities and Exchange Commission as Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 and incorporated by reference)
10.16 Description of 1998 deferred stock awards and issuances in
lieu of retainer to non-employee directors (filed with the
Securities and Exchange Commission as Exhibit 10.16 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated by reference)
10.17 Description of 1999 deferred stock awards (filed with the
Securities and Exchange Commission on page 8 under the
heading "Compensation of Directors" of Registrant's Proxy
Statement for the 2000 Annual Meeting and incorporated by
reference)
10.18 Description of 2000 deferred stock awards (to be filed with
the Securities and Exchange Commission under the heading
"Compensation of Directors" in Registrant's Proxy Statement
for the 2001 Annual Meeting and incorporated by reference)
10.19 Amended and Restated Deferred Compensation Plan for
Directors of State Street Corporation (filed with the
Securities and Exchange Commission as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 and incorporated by reference)
10.20 Amended and Restated Deferred Compensation Plan for
Directors of State Street Bank and Trust Company (filed with
the Securities and Exchange Commission as Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000 and incorporated by reference)
68
10.21 Registrant's 401(k) Restoration and Voluntary Deferral Plan
(filed with the Securities and Exchange Commission as
Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 and incorporated by
reference)
10.22 Individual Agreement dated December 8, 1997 with Maureen S.
Bateman
11.1 Computation of Earning per Share (information appears in
Note S to the Notes to the Consolidated Financial Statements
included in Part I, Item 8, "Financial Statements and
Supplementary Data")
12.1 Statement of ratio of earnings to fixed charges
21.1 Subsidiaries of State Street Corporation
23.1 Consent of Independent Auditors
(B) REPORTS ON FORM 8-K
A current report on Form 8-K dated December 7, 2000 was filed, by the
Registrant, on December 8, 2000 with the Securities and Exchange Commission that
reported an agreement to purchase a majority interest in Bel Air Investment
Advisors, LLC, a Los Angeles-based independent investment firm, for a total
price of $217 million. The transaction closed on February 8, 2001.
A current report on Form 8-K dated January 17, 2001 was filed, by the
Registrant, on January 17, 2001 with the Securities and Exchange Commission that
reported the Corporation's fourth quarter and full-year 2000 operating results.
A current report on Form 8-K dated February 6, 2001 was filed, by the
Registrant, on February 6, 2001 with the Securities and Exchange Commission that
reported the Corporation's interest in Bridge Information Systems, Inc., a
company experiencing financial difficulties.
A current report on Form 8-K dated February 15, 2000 was filed, by the
Registrant, on February 15, 2001 with the Securities and Exchange Commission
that reported that the Registrant has completed the purchase of a majority
interest in Bel Air Investment Advisors, LLC, a Los Angeles-based independent
investment firm.
69
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, on February 15, 2001, thereunto duly authorized.
STATE STREET CORPORATION
By: /s/ FREDERICK P. BAUGHMAN
-------------------------------------------
FREDERICK P. BAUGHMAN,
SENIOR VICE PRESIDENT, CONTROLLER
AND CHIEF ACCOUNTING OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on February 15, 2001 by the following persons on
behalf of the registrant and in the capacities indicated.
OFFICERS:
/s/ DAVID A. SPINA /s/ RONALD L. O'KELLEY
------------------------------------------- -------------------------------------------
DAVID A. SPINA, RONALD L. O'KELLEY,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
AND TREASURER
/S/ FREDERICK P. BAUGHMAN
-------------------------------------------
FREDERICK P. BAUGHMAN,
SENIOR VICE PRESIDENT, CONTROLLER
AND CHIEF ACCOUNTING OFFICER
DIRECTORS:
/s/ RONALD E. LOGUE
------------------------------------------- -------------------------------------------
RONALD E. LOGUE NICHOLAS A. LOPARDO
/s/ TENLEY E. ALBRIGHT /s/ I. MACALLISTER BOOTH
------------------------------------------- -------------------------------------------
TENLEY E. ALBRIGHT, M.D. I. MACALLISTER BOOTH
/s/ JAMES I. CASH, JR. /s/ TRUMAN S. CASNER
------------------------------------------- -------------------------------------------
JAMES I. CASH, JR. TRUMAN S. CASNER
/s/ NADER F. DAREHSHORI /s/ ARTHUR L. GOLDSTEIN
------------------------------------------- -------------------------------------------
NADER F. DAREHSHORI ARTHUR L. GOLDSTEIN
/s/ DAVID P. GRUBER /s/ LINDA A. HILL
------------------------------------------- -------------------------------------------
DAVID P. GRUBER LINDA A. HILL
/s/ JOHN M. KUCHARSKI /s/ CHARLES R. LAMANTIA
------------------------------------------- -------------------------------------------
JOHN M. KUCHARSKI CHARLES R. LAMANTIA
------------------------------------------- -------------------------------------------
DENNIS J. PICARD ALFRED POE
/s/ RICHARD P. SERGEL
------------------------------------------- -------------------------------------------
BERNARD W. REZNICEK RICHARD P. SERGEL
/s/ DIANA CHAPMAN WALSH /s/ ROBERT E. WEISSMAN
------------------------------------------- -------------------------------------------
DIANA CHAPMAN WALSH ROBERT E. WEISSMAN
70
EXHIBIT INDEX
(FILED HEREWITH)
Individual Agreement dated December 8, 1997 with Maureen S.
10.22 Bateman
12.1 Statement of ratio of earnings to fixed charges
21.1 Subsidiaries of State Street Corporation
23.1 Consent of Independent Auditors
71