-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, a/5fVXAH3Ykjjt3Hm9tDAuoBKoC1Ax5j5PkeMEztNUANMCv08GrvDmhXleyjRkBl ZMmjaENXma2b/5rqixK1IA== 0000950156-94-000009.txt : 19940331 0000950156-94-000009.hdr.sgml : 19940331 ACCESSION NUMBER: 0000950156-94-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATE STREET BOSTON CORP CENTRAL INDEX KEY: 0000093751 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 042456637 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-05108 FILM NUMBER: 94518911 BUSINESS ADDRESS: STREET 1: 225 FRANKLIN ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6177863000 FORMER COMPANY: FORMER CONFORMED NAME: STATE STREET BOSTON FINANCIAL CORP DATE OF NAME CHANGE: 19780525 10-K 1 STATE STREET BOSTON CORP. FORM 10-K ------------------------------------------------------------------------- ------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NO. 0-5108 STATE STREET BOSTON CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2456637 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION) IDENTIFICATION NO.) 225 FRANKLIN STREET BOSTON, MASSACHUSETTS 02110 (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICE) 617-786-3000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $1 PAR VALUE (TITLE OF CLASS) -------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [] THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT ON FEBRUARY 28, 1994 WAS $2,835,150,000. THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING ON FEBRUARY 28, 1994 WAS 76,111,410. PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED INTO THE PARTS OF THIS REPORT ON FORM 10-K INDICATED BELOW: (1) ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1993 (PARTS I AND II) AND (2) THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 15, 1994 (PART III) ------------------------------------------------------------------------- ------------------------------------------------------------------------- PART I ITEM 1. BUSINESS THE CORPORATION State Street Boston Corporation ("State Street") is a bank holding company organized under the laws of the Commonwealth of Massachusetts. State Street was organized in 1970 and conducts its business principally through its subsidiary, State Street Bank and Trust Company ("State Street Bank"), which 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. State Street is the fourth largest provider of trust services in the United States as ranked on the basis of 1992 fiduciary compensation. The major services contributing to fiduciary compensation are portfolio accounting, securities custody and other related services for mutual funds/collective investment funds; portfolio accounting, securities custody and other related services for retirement and other financial assets of corporations, public funds, endowments, foundations, and nuclear decommissioning trusts; investment management for institutions through State Street Global Advisors; personal trust; services for defined contribution plans; and corporate trust. Ranked on the basis of assets as of December 1992, State Street Bank is the 28th largest commercial bank in the United States. State Street's total assets were $18.7 billion at December 31, 1993, of which $13.5 billion, or 72%, were investment securities and money market assets and $2.6 billion, or 14%, were loans. State Street had $1.6 trillion of assets under custody, $201 billion of bonds under trusteeship, and $142 billion of assets under management at year-end 1993. Services are provided from offices in the United States, as well as from offices in Canada, Grand Cayman, Netherland Antilles, the United Kingdom, France, Belgium, Luxembourg, Germany, United Arab Emirates, Hong Kong, Taiwan, Japan, Australia, and New Zealand. State Street's executive offices are located at 225 Franklin Street, Boston, Massachusetts. BUSINESS OF THE CORPORATION State Street has two principal lines of business, financial asset services and commercial lending. FINANCIAL ASSET SERVICES Financial asset services is comprised of the business components that service and manage financial assets worldwide. These include services for mutual funds and pension plans, both defined benefit and defined contribution; corporate trusteeship; and management of institutional financial assets and personal trust. A broad array of banking services is provided, including accounting, recordkeeping, custody of securities, information services and recordkeeping; taking short-term customer funds onto State Street's balance sheet; investment management; foreign exchange trading; and cash management. State Street began providing mutual fund services in 1924, and now has $683 billion of the mutual fund industry's assets under custody. State Street is the leading mutual fund custodian in the United States, servicing 37% of the registered funds. Customers who sponsor the 1,948 U.S. mutual funds that State Street services include investment companies, broker/dealers, insurance companies and others. In addition, State Street services 192 collective investment funds registered outside of the United States. State Street's mutual fund services include domestic and global custody services, which incorporates safekeeping portfolio assets, settling trades, collecting and accounting for income, monitoring corporate actions and reporting investable cash. State Street also offers portfolio accounting, pricing, general ledger accounting, fund administration and other services. Shareholder accounting is provided through a 50%-owned affiliate. State Street began servicing pension assets in 1974. Servicing $574 billion of assets for North American customers, it is currently ranked as the largest servicer of tax exempt assets for corporations and public funds in the United States. Financial asset services are also provided for portfolios of unions, endowments, foundations, and nuclear decommissioning trusts. In addition, State Street provides global and domestic services for $66 billion in assets for customers outside North America. In the late 1970s, State Street began managing assets for institutions and was a pioneer in the development of domestic and international index funds. The products now offered also include enhanced and fully active equity strategies, short-term investment funds and fixed income. These products are sold domestically and from nine locations outside the United States. At year- end 1993, institutional assets managed were $136 billion. State Street is ranked as the largest manager of internationally-indexed assets and the third largest manager of tax-exempt money in the United States. State Street is a leading New England trustee and money manager for individuals, and provides planned gift management services for non-profit organizations throughout the United States. State Street acts as participant recordkeeper, securities custodian and trustee for defined contribution plans, such as 401(k) plans and ESOPs, and issues checks for employee benefit distributions. Corporate trust services for asset-backed securities, corporate securities, leveraged leases, and municipal securities are provided to investment banks, corporations, municipalities and government agencies from five offices in the United States. At year ended 1993, bonds under trusteeship totaled $201 billion. State Street acts as a mortgage subservicer through Wendover Funding Inc. in Greensboro, North Carolina. State Street also provides card replacement and other services for a bank card association, processing of unclaimed securities for state governments, accounting services for retained asset accounts of insurance companies and clearing services for correspondent banks. State Street provides foreign exchange trading, global cash management and trading of securities to financial institutions and corporations. Funds are gathered in the form of domestic and foreign deposits, federal funds and securities sold under repurchase agreements from local, national and international sources. Trading and arbitrage operations are conducted with government securities, futures and options. Municipal dealer activities include underwriting, trading and distribution of general obligation tax- exempt bonds and notes. Treasury centers are located in Boston, London, Hong Kong, Tokyo and Sydney. State Street also provides corporate finance services, including private placement of debt and equity, acquisitions and divestitures and project finance. COMMERCIAL LENDING State Street provides corporate banking, specialized lending and international banking to businesses and financial institutions. The corporate banking services are offered primarily to New England middle market companies. Specialized lending is both regional and national, with specialties that include communications, publishing, law firms, broker/dealers and other financial institutions. In addition, State Street offers asset-based finance, leasing, real estate, and trade finance. Trade finance includes letters of credit, collection, payment and other specialized services for importers and exporters. Dollar clearing and other correspondent banking services are provided through an Edge Act subsidiary in New York City. SELECTED STATISTICAL INFORMATION The following tables contain State Street's consolidated statistical information relating to, and should be read in conjunction with, the consolidated financial statements. Additionally, certain previously reported amounts have been reclassified to conform to the present method of presentation. 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.
1993 1992 1991 --------------------------------- -------------------------------- ------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ---- ------- -------- ---- ------- -------- ---- (DOLLARS IN THOUSANDS) ASSETS Interest-bearing deposits with banks(1) ............ $ 5,021,752 $201,453 4.01% $ 5,101,515 $257,615 5.05% $ 3,646,161 $261,992 7.19% Securities purchased under resale agreements ....... 3,255,014 102,338 3.14 2,602,740 97,570 3.75 912,519 51,408 5.63 Federal funds sold ........ 413,601 12,642 3.06 330,019 11,579 3.51 305,391 17,793 5.83 Trading account assets .... 369,050 15,551 4.21 226,290 10,081 4.45 151,840 11,850 7.80 Investment securities: U.S. Treasury and Federal agencies .............. 2,076,758 119,495 5.75 1,703,026 115,745 6.80 1,416,754 115,599 8.16 State and political 682,856 37,823 5.54 375,972 28,998 7.72 378,431 34,424 9.09 Other investments ....... 1,826,568 97,383 5.33 1,443,628 87,963 6.09 1,212,333 100,850 8.32 Loans(2) Domestic ................ 2,261,915 113,272 5.01 1,952,638 111,329 5.70 2,019,915 156,163 7.73 Foreign ................. 314,122 19,137 6.09 117,707 7,156 6.08 87,473 6,502 7.43 ----------- -------- ----------- -------- ----------- -------- Total interest- earning assets ............ 16,221,636 719,094 4.43 13,853,535 728,036 5.26 10,130,817 756,581 7.47 -------- -------- -------- Cash and due from banks ... 911,082 818,991 774,715 Allowance for loan losses . (57,522) (66,767) (63,550) Premises and equipment .... 435,475 358,895 268,902 Customers' acceptance liability(3) ........ 33,363 51,745 60,562 Other assets .............. 625,133 485,720 402,961 ----------- ----------- ----------- Total Assets ........ $18,169,167 $15,502,119 $11,574,407 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ................. $ 2,166,996 52,175 2.41 $ 2,153,699 67,967 3.16 $ 1,818,398 94,936 5.22 Time .................... 157,481 4,531 2.88 162,464 6,265 3.86 306,789 18,417 6.00 Foreign ................. 4,953,696 146,051 2.95 3,954,528 174,615 4.42 2,648,345 173,396 6.55 Federal funds purchased ... 741,082 21,023 2.84 919,109 30,818 3.35 837,006 45,878 5.48 Securities sold under repurchase agreements .............. 4,133,726 119,300 2.89 3,290,196 112,407 3.42 1,765,768 89,778 5.08 Other short-term borrowings 215,948 8,156 3.78 193,927 8,281 4.27 155,810 8,235 5.29 Notes payable ............. 510,719 19,943 3.90 388,513 18,400 4.74 234,331 20,353 8.69 Long-term debt ............ 122,403 10,023 8.19 146,394 13,327 9.10 146,407 13,238 9.04 ----------- -------- ----------- -------- ----------- -------- Total interest- bearing liabilities ....... 13,002,051 381,202 2.93 11,208,830 432,080 3.85 7,912,854 464,231 5.87 -------- ---- -------- ---- -------- ---- Noninterest-bearing deposits .................. 3,622,849 2,952,363 2,460,175 Acceptances outstanding(3) 33,956 52,423 61,150 Other liabilities ......... 477,640 401,953 367,295 Stockholders' equity ...... 1,032,671 886,550 772,933 ----------- ----------- ----------- Total Liabilities and Stockholders' Equity ............ $18,169,167 $15,502,119 $11,574,407 ----------- ----------- ----------- ----------- ----------- ----------- Net interest revenue $337,892 $295,956 $292,350 -------- -------- -------- -------- -------- -------- Excess of rate earned over rate paid .... 1.50% 1.41% 1.60% ---- ---- ---- ---- ---- ---- Net Interest Margin(4) 2.08% 2.14% 2.89% ---- ---- ---- ---- ---- ---- - --------- (1) Amounts reported were with non-U.S. domiciled offices of other banks. (2) Non-accrual loans are included in the average loan amounts outstanding. (3) In 1993, 1992 and 1991, 13%, 9% and 5% of acceptances were foreign. (4) Net interest margin is taxable equivalent net interest revenue divided by total 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% in 1993 and 34% in 1992 and 1991, adjusted for applicable state income taxes net of the related Federal tax benefit. DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) 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.
1993 COMPARED TO 1992 1992 COMPARED TO 1991 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO NET DUE TO NET -------------------------- INCREASE ------------------------- INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ------ ---- ---------- ------ ---- ---------- (DOLLARS IN THOUSANDS) Interest revenue related to: Interest-bearing deposits with banks .............. $ (3,971) $ (52,191) $ (56,162) $ 86,856 $ (91,234) $ (4,378) Securities purchased under resale agreements ....... 22,047 (17,279) 4,768 68,142 (21,979) 46,163 Federal funds sold ........ 2,684 (1,621) 1,063 1,338 (7,552) (6,214) Trading account assets .... 6,044 (574) 5,470 4,488 (6,258) (1,770) Investment securities: U.S. Treasury and Federal agencies .... 23,101 (19,351) 3,750 21,212 (21,067) 145 State and political subdivisions ........ 18,732 (9,907) 8,825 (223) (5,203) (5,426) Other investments ..... 21,349 (11,929) 9,420 17,079 (29,965) (12,886) Loans: Domestic .............. 16,410 (14,467) 1,943 (5,051) (39,782) (44,833) Foreign ............... 11,966 15 11,981 1,980 (1,327) 653 --------- --------- -------- -------- --------- ------- Total interest- earning assets .... 118,362 (127,304) (8,942) 195,821 (224,367) (28,546) --------- --------- -------- -------- --------- -------- Interest expense related to: Deposits: Savings................ 417 (16,209) (15,792) 15,290 (42,259) (26,969) Time .................. (187) (1,547) (1,734) (6,898) (5,253) (12,151) Foreign ............... 37,815 (66,379) (28,564) 68,813 (67,594) 1,219 Federal funds purchased ... (5,455) (4,341) (9,796) 4,150 (19,211) (15,061) Securities sold under repurchase agreements ... 26,045 (19,151) 6,894 59,200 (36,572) 22,628 Other short-term borrowings 886 (1,012) (126) 1,798 (1,752) 46 Notes payable ............. 5,138 (3,595) 1,543 9,799 (11,752) (1,953) Long-term debt ............ (2,048) (1,255) (3,303) (1) 90 89 -------- --------- -------- -------- --------- -------- Total interest-bearing liabilities ....... 62,611 (113,489) (50,878) 152,151 (184,303) (32,152) -------- --------- -------- -------- --------- -------- Net Interest Revenue $ 55,751 $ (13,815) $ 41,936 $ 43,670 $ (40,064) $ 3,606 -------- --------- -------- -------- --------- -------- -------- --------- -------- -------- --------- --------
RETURN ON EQUITY AND ASSETS AND CAPITAL RATIOS The return on equity, return on assets, dividend payout ratio, equity to assets ratio and capital ratios for the years ended December 31, were as follows: 1993 1992 1991 ---- ---- ---- Net income to: Average stockholders' equity ................. 17.4% 18.1% 18.0% Average total assets ..... .99 1.03 1.20 Dividends declared to net income ................... 21.9 20.8 20.4 Average equity to average assets ................... 5.7 5.7 6.7 Risk-based ratios: Tier 1 capital ........... 12.1 13.2 14.1 Total capital ............ 12.7 14.6 16.4 INVESTMENT PORTFOLIO During the fourth quarter of 1992 State Street classified a portion of its investment securities portfolio as being available for sale. This reflects the intent to hold these securities for an indefinite period of time, not necessarily until final maturity. Securities classified as available for sale are carried at the lower of amortized cost or market. Investment securities consisted of the following at December 31: 1993 1992 1991 ------ ------- ------ (DOLLARS IN MILLIONS) HELD FOR INVESTMENT U.S. Treasury and Federal agencies ................... $1,272 $ 996 $1,583 State and political subdivisions ............... 1,084 451 382 Asset-backed securities .... 2,028 1,618 1,150 Other investments .......... 100 87 135 ------ ------ ------ Total ................ 4,484 3,152 3,250 AVAILABLE FOR SALE U.S. Treasuries ............ 1,122 940 Other investments .......... 95 ------ ------ Total ................ 1,217 940 ------ ------ ------ Total investment securities ......... $5,701 $4,092 $3,250 ------ ------ ------ ------ ------ ------ The maturities of investment securities at December 31, 1993 and the weighted average yields (fully taxable equivalent basis) were as follows:
MATURING --------------------------------------------------------------------------------------------- AFTER ONE AFTER FIVE ONE YEAR BUT WITHIN BUT WITHIN AFTER OR LESS FIVE YEARS TEN YEARS TEN YEARS -------------------- ---------------------- ------------------- -------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------ ----- ------ ----- ------ ----- (DOLLARS IN MILLIONS) HELD FOR INVESTMENT U.S. Treasury and Federal agencies . $ 636 5.14% $ 603 4.93% $ 11 4.92% $ 22 4.90% 701 4.50 309 6.22 71 6.87 3 9.78 Asset-backed securities ............ 1,141 4.88 766 4.79 112 4.75 9 4.72 Other investments .................. 72 3.89 16 6.73 2 4.91 10 7.53 ------ ------ ---- ---- Total ........................ 2,550 1,694 196 44 AVAILABLE FOR SALE U.S. Treasuries .................... 341 7.61 781 4.62 Other investments .................. 48 6.56 47 6.61 ------ ------ Total ........................ 389 828 ------ ------ ---- ---- Total investment securities .. $2,939 $2,522 $196 $ 44 ------ ------ ---- ---- ------ ------ ---- ----
LOAN PORTFOLIO Domestic and foreign loans at December 31 and average loans outstanding for the years ended December 31, were as follows:
1993 1992 1991 1990 1989 ---------- ---------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Domestic: Commercial and financial ......... $1,889,143 $1,519,037 $1,411,994 $1,539,069 $1,417,103 Real estate ......... 94,073 105,156 128,376 173,530 247,072 Consumer ............ 46,315 64,841 75,366 94,680 538,546 Lease financing ..... 254,525 251,761 211,350 199,392 196,293 ---------- ---------- ---------- ---------- ---------- Total domestic .. 2,284,056 1,940,795 1,827,086 2,006,671 2,399,014 ---------- ---------- ---------- ---------- ---------- Foreign: Commercial and industrial ........ 295,716 50,838 67,622 55,500 48,857 Banks and other financial institutions ...... 25,940 8,838 7,495 38,141 14,728 Government and official institutions ...... 1,000 1,000 1,000 1,000 1,000 Lease financing ..... 70,976 Other ............... 2,486 2,242 2,112 3,762 1,423 ---------- ---------- ---------- ---------- ---------- Total foreign ... 396,118 62,918 78,229 98,403 66,008 ---------- ---------- ---------- ---------- ---------- Total loans ..... $2,680,174 $2,003,713 $1,905,315 $2,105,074 $2,465,022 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average loans outstanding $2,576,037 $2,070,345 $2,107,388 $2,621,429 $2,467,473 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Selected loan maturities at December 31, 1993 were as follows:
AFTER ONE ONE YEAR BUT WITHIN AFTER OR LESS FIVE YEARS FIVE YEARS ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Commercial and financial ............................ $1,535,927 $251,609 $101,607 Real estate ......................................... 40,098 49,960 4,015 Foreign ............................................. 313,464 11,678 70,976
The following table shows the classification of the above loans due after one year according to sensitivity to changes in interest rates:
(DOLLARS IN THOUSANDS) Loans with predetermined interest rates .............................................. $201,013 Loans with floating or adjustable interest rates ..................................... 288,832 -------- Total ............................................................................ $489,845 -------- --------
Loans are evaluated on an individual basis to determine the appropriateness of renewing each loan. State Street does not have a general policy. Unearned revenue included in loans was $4,423,000 and $5,467,000 at December 31, 1993 and 1992, 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. 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. Past due loans are loans on which principal or interest payments are over 90 days delinquent, but where interest continues to be accrued. The following schedule discloses information concerning non-accrual and past due loans. NON-ACCRUAL LOANS (CONTINUED)
DECEMBER 31 ----------------------------------------------------------- 1993 1992 1991 1990 1989 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Non-accrual: Domestic ............................. $26,804 $39,954 $39,620 $54,273 $19,090 Foreign .............................. 323 1,337 2,206 2,673 ------- ------- ------- ------- ------- Total non-accrual ................ $26,804 $40,277 $40,957 $56,479 $21,763 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Past due: Domestic ............................. $ 86 $ 288 $ 44 $ 2,590 $ 1,507 Foreign .............................. 65 507 88 541 ------- ------- ------- ------- ------- Total past due ................... $ 86 $ 353 $ 551 $ 2,678 $ 2,048 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
The interest revenue for 1993 which would have been recorded related to these non-accrual loans is $2,796,000 for domestic loans. The interest revenue that was recorded on these non-accrual loans was $812,000, all of which relates to domestic loans. Loans totaling $12,914,000 were restructured in 1993, are performing in accordance with their new terms and are accruing at a market rate. ALLOWANCE FOR LOAN LOSSES The changes in the allowance for loan losses for the years ended December 31, were as follows:
1993 1992 1991 1990 1989 ----- ----- ---- ----- ----- (DOLLARS IN THOUSANDS) Balance at beginning of year: Domestic ........................ $56,987 $64,323 $49,007 $48,958 $48,906 Foreign ......................... 944 1,565 1,968 1,347 1,100 ------- ------- ------- ------- -------- Total allowance for loan losses .................. 57,931 65,888 50,975 50,305 50,006 ------- ------- ------- ------- ------- Provision (credit) for loan losses: Domestic ........................ 10,247 11,734 59,989 43,746 16,693 Foreign ......................... 1,073 467 23 1,915 2,727 ------- ------- ------- ------- ------- Total provision for loan losses .................. 11,320 12,201 60,012 45,661 19,420 ------- ------- ------- ------- ------- Loan charge-offs: Commercial and financial ........ 15,241 9,794 33,687 12,266 5,708 Real estate construction ........ 20 4,753 6,315 6,680 543 Real estate mortgage ............ 1,607 5,800 4,625 2,599 941 Consumer ........................ 1,416 1,811 2,273 25,197 13,627 Foreign ......................... 261 1,356 870 1,337 2,885 ------- ------- ------- ------- ------- Total loan charge-offs ...... 18,545 23,514 47,770 48,079 23,704 ------- ------- ------- ------- ------- Recoveries: Commercial and financial ........ 1,178 1,414 1,494 256 487 Real estate contruction ......... 73 259 4 9 Real estate mortgage ............ 206 488 52 Consumer ........................ 561 927 681 2,785 3,682 Foreign ......................... 187 268 444 43 405 ------- ------- ------- ------- ------- Total recoveries ............ 2,205 3,356 2,671 3,088 4,583 ------- ------- ------- ------- ------- Net loan charge-offs ........ 16,340 20,158 45,099 44,991 19,121 ------- ------- ------- ------- ------- Allowance of foreign subsidiary purchased ........................... 1,405 Balance at end of year: Domestic ........................ 50,968 56,987 64,323 49,007 48,958 Foreign ......................... 3,348 944 1,565 1,968 1,347 ------- ------- ------- ------- ------- Total allowance for loan losses .................. $54,316 $57,931 $65,888 $50,975 $50,305 ------- ------- ------- -------- ------- ------- ------- ------- ------- ------- Ratio of net charge-offs to average loans outstanding ................. .63% .97% 2.14% 1.72% .77% --- --- ----- ----- ----- --- --- ----- ----- -----
ALLOWANCE FOR LOAN LOSSES (CONTINUED) 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 the evaluation of the level of risk in the portfolio, the volume of adversely classified loans, previous loss experience, current trends, and expected economic conditions and their effect on borrowers. While the allowance is established to absorb probable losses inherent in the total loan portfolio, management allocates the allowance for loan losses to specific loans, selected portfolio segments and certain off-balance sheet exposures and commitments. Adversely classified loans in excess of $1 million are individually reviewed to evaluate risk of loss and 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, 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 provision for loan losses is a charge to earnings for the current period which 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 $11.3 million for 1993, which compares to $12.2 million in 1992. At December 31, 1993, the allowance for loan losses was $54.3 million, or 2.03% of loans. This compares to an allowance of $57.9 million or 2.89% of loans a year ago. This decline reflects improvement in measures of credit quality and improvement in the outlook for general economic conditions and its affect on borrowers. The decline in the allowance for loan losses as a percentage of loan volume is also attributable to the growth in loan exposures to financial asset services customers and securities brokers in conjunction with their trading and settlement activity. These are generally short-term, usually overnight, and are structured to have relatively low credit exposure. CREDIT QUALITY At December 31, 1993, loans comprised 14% of State Street's assets, compared to over 55% for other banking companies of comparable size. State Street's loan policies limit the size of individual loan exposures to reduce risk through diversification. In 1993, net charge-offs declined from $20.1 million to $16.3 million. Net charge-offs as a percentage of average loans were .63% compared to .97% for 1992. At December 31, 1993, total non-performing assets were $37.9 million, a $14.9 million decrease from year-end 1992. Non-performing assets include $26.8 million of non-accrual loans and $11.1 million of other real estate owned. In 1993, loans placed on non-accrual status were more than offset by charge-offs, payments, and the return to accrual status of several loans. The decline in other real estate owned resulted from property sales. In 1993, measures of credit quality improved, as discussed above, as did the general economic outlook. The economy in the Northeast began to expand modestly after several years of decline. We expect continued improvement in credit quality in 1994. CROSS-BORDER OUTSTANDINGS Countries with which State Street has cross-border outstandings (primarily deposits with banks and letters of credit) of at least 1% of its total assets, all of which were to banks and other financial institutions, at December 31, 1993, 1992 and 1991, were as follows:
1993 1992 1991 --------- --------- --------- (DOLLARS IN THOUSANDS) Japan ............................................... $1,688,130 $1,630,148 $1,316,383 United Kingdom ...................................... 613,515 524,352 517,720 France .............................................. 519,565 444,637 371,585 Australia ........................................... 498,671 174,652 Italy ............................................... 367,931 420,535 283,605 Germany ............................................. 339,477 371,657 209,166 Canada .............................................. 289,152 220,217 180,472 Netherlands ......................................... 224,622 Hong Kong ........................................... 206,443 Switzerland ......................................... 175,052 167,360 ---------- ---------- ---------- Total outstandings ............................ $4,747,506 $3,961,250 $3,046,291 ---------- ---------- ---------- ---------- ---------- ----------
Aggregate of cross-border outstandings in countries having between .75% and 1% of total assets at December 31, 1993 was $171,688,000 (Belgium); December 31, 1992 was $139,333,000 (Austria); and at December 31, 1991 was $136,792,000 (Sweden). At December 31, 1993 there was $499,000 of cross-border risk with Mexico. DEPOSITS The average balance and rates paid on interest-bearing deposits for the years ended December 31, were as follows:
1993 1992 1991 ---------------------- ----------------------- ------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE ----------- ------- ---------- ------- ------- ------- (DOLLARS IN THOUSANDS) Domestic: Noninterest-bearing deposits ................ $3,589,812 $2,920,939 $2,434,756 Savings deposits .......... 2,166,996 2.41% 2,153,699 3.16% 1,818,398 5.22% Time deposits ............. 157,481 2.88 162,464 3.86 306,789 6.00 ---------- ---------- ---------- Total domestic ........ $5,914,289 $5,237,102 $4,559,943 ---------- ---------- ---------- ---------- ---------- ---------- Foreign: Noninterest-bearing deposits ................ $ 33,037 $ 31,424 $ 25,419 Time deposits ............. 4,953,696 2.95 3,954,528 4.42 2,648,345 6.55 ---------- ---------- ---------- Total foreign ......... $4,986,733 $3,985,952 $2,673,764 ---------- ---------- ---------- ---------- ---------- ----------
Maturities of domestic certificates of deposit of $100,000 or more at December 31, 1993, were as follows:
(DOLLARS IN THOUSANDS) 3 months or less .......................................................... $62,947 3 to 6 months ............................................................. 8,058 6 to 12 months ............................................................ 3,063 Over 12 months ............................................................ 7,902 ------- Total ............................................................... $81,970 ------- -------
At December 31, 1993, substantially all foreign time deposit liabilities were in amounts of $100,000 or more. Included in noninterest-bearing deposits were foreign deposits of $28,519,000, $41,492,000 and $22,188,000 at December 31, 1993, 1992 and 1991. 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: FEDERAL SECURITIES SOLD FUNDS UNDER REPURCHASE PURCHASED AGREEMENTS --------- ---------- (DOLLARS IN THOUSANDS) Balance as of December 31: 1993 ................................. $ 269,083 $2,972,928 1992 ................................. 623,670 2,751,416 1991 ................................. 587,985 3,821,035 Maximum outstanding at any month end: 1993 ................................. $1,081,811 $5,297,210 1992 ................................. 1,522,522 4,313,852 1991 ................................. 1,106,712 3,890,188 Average outstanding during the year: 1993 ................................. $ 741,082 $4,133,726 1992 ................................. 919,109 3,290,196 1991 ................................. 837,006 1,765,768 Weighted average interest rate at year end: 1993 ................................. 2.7% 2.7% 1992 ................................. 2.3 2.8 1991 ................................. 3.7 4.1 Weighted average interest rate during the year: 1993 ................................. 2.8 2.9 1992 ................................. 3.4 3.4 1991 ................................. 5.5 5.1 COMPETITION State Street is subject to competition in all of its products and markets worldwide. In addition to competition from other deposit taking institutions, State Street competes with investment management firms, private trustees, insurance companies, mutual funds, broker/dealers, investment banking firms, law firms, benefit consultants, and business service companies. As State Street expands globally, additional types of competition are encountered. EMPLOYEES At December 31, 1993, State Street had 10,117 employees, of whom 9,684 were full-time. REGULATION AND SUPERVISION State Street is registered with the Board of Governors of the Federal Reserve System (the "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 non-bank subsidiaries to those which are deemed by the Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determination, the Board must consider whether the performance of any such activity by a subsidiary of State Street can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Board is authorized to differentiate between activities commenced de novo and those commenced by the acquisition in whole or in part of a going concern. 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 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. The Act prohibits a bank holding company from acquiring shares of a bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted unless such an acquisition is specifically authorized by statute of the other state. State Street and its non-bank 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 REGULATION AND SUPERVISION (CONTINUED) purchases by State Street Bank to State Street and its non-bank subsidiaries. Transfers of this kind to State Street and its non-bank 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 also 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. The Board has jurisdiction to regulate the terms of certain debt issues of bank holding companies. The primary banking agency responsible for regulating State Street and its subsidiaries, including State Street Bank, for both domestic and international operations is the Federal Reserve Bank of Boston. 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 located in France, Japan and Luxembourg are also subject to regulation by the regulatory authorities of those countries. The capital of each of these banking subsidiaries is in excess of the minimum legal capital requirements as set by those authorities. State Street Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation (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. In 1990, Massachusetts adopted a law which permits Massachusetts banking institutions to acquire banking institutions located in other states based on a reciprocal basis. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") broadened the enforcement powers of the federal banking agencies, including increased power to impose fines and penalties, over all financial institutions, including bank holding companies and commercial banks. The Crime Control Act of 1990 further broadened the enforcement powers of the federal banking agencies in a significant number of areas. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") has as its primary objectives to recapitalize the Bank Insurance Fund ("BIF") and strengthen the regulation and supervision of financial institutions. During 1993, the federal banking agencies continued the process of promulgating regulations to implement the statute. The "Prompt Corrective Action" provisions of the FDICIA are for the stated purpose: "to resolve the problems of insured depository institutions at the least possible long-term loss to the deposit insurance fund." Each federal banking agency has implemented prompt corrective action regulations for the institutions that it regulates. The statute requires or permits the agencies to take certain supervisory actions when an insured depository institution falls within one of five specifically enumerated capital categories. It also restricts or prohibits certain activities and requires the submission of a capital restoration plan when an insured institution becomes undercapitalized. The implementing regulations establish the numerical limits for the capital categories and establish procedures for issuing and contesting prompt corrective action directives. To be within the category "well capitalized", an insured depository institution must have a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent or greater, and the institution must not be subject to an order, written agreement, capital directive, or prompt corrective action directive to meet specific capital requirements. An insured institution is "adequately capitalized" if it has a total risk-based capital ratio of 8.0 percent or greater, a Tier 1 risk-based capital ratio of 4.0 percent or greater, and a leverage ratio of 4.0 percent or greater (or a leverage ratio of 3.0 percent or greater if the institution is rated composite 1 under the regulatory rating system). The final three capital categories are levels of undercapitalized, which trigger mandatory statutory provisions. While other factors in addition to capital ratios determine an institution's capital category, State Street and State Street Bank each were within the "well-capitalized" category at December 31, 1993. The FDICIA requires the FDIC to recapitalize the BIF within a prescribed time frame of 15 years and to adopt a risk-based deposit insurance assessment system. The FDIC adopted a BIF recapitalization schedule REGULATION AND SUPERVISION (CONTINUED) and a final rule establishing a permanent risk-based assessment system, which is based on definitions of capital categories consistent with the "Prompt Corrective Actions" provisions. The rule is effective with the assessment period starting on January 1, 1994. Depending on which of the nine capital and supervisory categories a bank falls in, deposit insurance premiums will continue to range from 23 cents per $100 of domestic deposits for well- capitalized, financially sound institutions to a maximum of 31 cents for the lowest category. The Federal Reserve Board adopted a final rule, as required by the FDICIA, prescribing standards that will limit the risks posed by an insured depository institution's exposure to any other depository institution. Banks are required to develop written policies and procedures to monitor credit exposure to other banks, and to limit to 50% and 25% of total capital exposure to "undercapitalized" banks in 1994 and 1995, respectively. As required by the FDICIA, the FDIC adopted a regulation that permits only well capitalized banks, and adequately capitalized banks that have received waivers from the FDIC, to accept, renew or rollover brokered deposits. Regulations have also been adopted by the FDIC to limit the activities conducted as a principal by, and the equity investments of, state-chartered banks to those permitted for national banks. Banks may apply to the FDIC for approval to continue to engage in excepted investments and activities. Other FDICIA regulations adopted require independent audits, an independent audit committee of the bank's board of directors, stricter truth- in-savings provisions, and standards for real estate lending. The FDICIA amended deposit insurance coverage and the FDIC has implemented a rule specifying the treatment of accounts to be insured up to $100,000. Under other provisions of FDICIA, the federal banking agencies have proposed safety and soundness standards for banks in a number of areas including: internal controls, internal audit systems, information systems, credit underwriting, interest rate risk, executive compensation and minimum earnings. The agencies have also proposed rules to revise risk-based capital standards to take account of interest rate risk, as required by FDICIA. It is anticipated that the FDICIA and related regulations will result in higher costs for the banking industry in terms of deposit insurance assessments and costs of compliance and recordkeeping. DIVIDENDS As a bank holding company, State Street is a legal entity separate and distinct from State Street Bank and its other non-bank subsidiaries. State Street's principal source of cash revenues is dividends from State Street Bank and its other non-bank subsidiaries. The right of State Street to participate as a stockholder in any distribution of assets of a subsidiary upon its liquidation or reorganization or otherwise is subject to the prior claims by creditors of the subsidiary, including obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. Payment of dividends by State Street Bank is subject to provisions of the Massachusetts banking law which provide 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 therefor. Under the Federal Reserve Act, the approval of the Board of Governors of the Federal Reserve System 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, 1993 State Street Bank could have declared and paid dividends of $366,454,000 without regulatory approval. Future dividend payments of the Bank and non-bank 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 instruments utilized by the Federal Reserve Board include 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. 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 415,000 square feet (or approximately 45% of the space in this building) for a 30-year initial term with two successive extension options of 20 years each at rentals to be negotiated. State Street exercised the first of the two (2) options which will be effective on January 1, 1996 for a term of 20 years. State Street owns five buildings located in Quincy, Massachusetts, a suburb of Boston. Four of the buildings, containing a total of approximately 1,365,000 square feet, function as the Bank's operations facilities. The Bank occupies approximately 1,275,000 square feet and subleases the remaining space. 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 98,000 square foot building in Westborough, Massachusetts for use as a second data center. The remaining offices and facilities of State Street and its subsidiaries are leased. As of December 31, 1993, the aggregate mortgage and lease payments, net of sublease revenue, payable within one year amounted to $23,632,000, plus assessments for real estate tax, cleaning and operating escalations. 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 - ---- --- -------- Marshall N. Carter ............................ 54 Chairman and Chief Executive Officer David A. Spina ................................ 51 Vice Chairman George J. Fesus ............................... 51 Executive Vice President, Chief Financial Officer and Treasurer A. Edward Allinson ............................ 59 Executive Vice President Dale L. Carleton .............................. 49 Executive Vice President Susan Comeau .................................. 52 Executive Vice President Howard H. Fairweather ......................... 55 Executive Vice President Charles J. Kelly .............................. 49 Executive Vice President Ronald E. Logue ............................... 48 Executive Vice President Nicholas A. Lopardo ........................... 47 Executive Vice President Albert E. Petersen ............................ 48 Executive Vice President David J. Sexton ............................... 54 Executive Vice President Norton Q. Sloan ............................... 57 Executive Vice President
There are no family relationships between any director and executive officer of State Street. With the exception of Messrs. Carter, Allinson, Logue and Petersen, all of the executive officers have been officers of State Street for five years or more. Mr. Carter became President of State Street in July, 1991, Chief Executive Officer in January, 1992 and Chairman in January, 1993. Prior to joining State Street, he was with Chase Manhattan Bank for 15 years, including the last three as head of global securities services. Mr. Allinson became an officer of State Street in March, 1990. Prior to joining State Street, he was President of Mitchell Hutchins Asset Management, a subsidiary of PaineWebber Incorporated, responsible for six financial service subsidiaries. Mr. Petersen became an officer of State Street in August, 1991. Prior to joining State Street, he was an Executive Vice President at First Empire State Corporation, a bank holding company, responsible for operations and systems. Mr. Logue became an officer of State Street in 1991. Prior to joining State Street, he was Executive Vice President at Bank of New England Corporation where he was head of processing services. PART II ITEM 5. MARKET FOR THE 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 on page 34 of State Street's 1993 Annual Report to Stockholders and is incorporated by reference. There were 5,886 stockholders of record at February 28, 1994. State Street's common stock is traded over-the-counter on the National Marker System, ticker symbol: STBK. ITEM 6. SELECTED FINANCIAL DATA The information is set forth on page 21 of State Street's 1993 Annual Report to Stockholders and is incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required by this item appears in State Street's 1993 Annual Report to Stockholders on pages 2 and 3 and pages 22 through 35 and is incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL DATA The Consolidated Financial Statements, Report of Independent Auditors and Supplemental Financial Data appearing on pages 36 through 55 of State Street's 1993 Annual Report to Stockholders and are incorporated by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning State Street's directors appears on pages 1 through 6 of State Street's Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption "Election of Directors" which Statement is to be filed with the Securities and Exchange Commission. Such information is incorporated 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. ITEM 11. EXECUTIVE COMPENSATION Information concerning compensation of the executives of State Street appears on pages 10 through 17 in State Street's Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption "Executive Compensation". Such information is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management appears on pages 7 and 8 in State Street's Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption "Beneficial Ownership of Shares". Such information is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions appears on page 9 in State Street's Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption "Certain Transactions". Such information is incorporated by reference. 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 included in its Annual Report to Stockholders for the year ended December 31, 1993, are incorporated by reference in Item 8 hereof: Consolidated Statement of Income--Years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Condition--December 31, 1993 and 1992 Consolidated Statement of Cash Flows -- Years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Changes in Stockholders' Equity -- Years ended December 31, 1993, 1992 and 1991 Notes to Financial Statements Report of Independent Auditors (2) Financial Statement Schedules -- Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions, are inapplicable, or the information is contained herein and therefore have been omitted. (3) Exhibits A list of the exhibits filed or incorporated by reference appears following page 16 of this Report, which information is incorporated by reference. (b) Reports on Form 8-K A current report on Form 8-K dated October 8, 1993 was filed which reported on the issuance by State Street of $100 million principal amount of 5.95% notes due September 15, 2003.
SIGNATURES Pursuant to the requirements 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 March 17, 1994, thereunto duly authorized. STATE STREET BOSTON CORPORATION By REX S. SCHUETTE ----------------------------------------- REX S. SCHUETTE Senior Vice President and Comptroller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 17, 1994, by the following persons on behalf of the registrant and in the capacities indicated. OFFICERS: MARSHALL N. CARTER DAVID A. SPINA - ---------------------------------------------------- ------------------------------------------------ MARSHALL N. CARTER, Chairman DAVID A. SPINA, Vice Chairman and Chief Executive Officer GEORGE J. FESUS REX S. SCHUETTE - ---------------------------------------------------- ------------------------------------------------ GEORGE J. FESUS, Executive Vice President, REX S. SCHUETTE, Senior Vice President Chief Financial Officer and Treasurer and Comptroller DIRECTORS: TENLEY E. ALBRIGHT JOSEPH A. BAUTE - ---------------------------------------------------- ------------------------------------------------ TENLEY E. ALBRIGHT JOSEPH A. BAUTE I. MACALLISTER BOOTH JAMES I. CASH - ---------------------------------------------------- ------------------------------------------------ I. MACALLISTER BOOTH JAMES I. CASH TRUMAN S. CASNER NADER F. DAREHSHORI - ---------------------------------------------------- ------------------------------------------------ TRUMAN S. CASNER NADER F. DAREHSHORI LOIS D. JULIBER CHARLES F. KAYE - ---------------------------------------------------- ------------------------------------------------ LOIS D. JULIBER CHARLES F. KAYE GEORGE H. KIDDER - ---------------------------------------------------- ------------------------------------------------ GEORGE H. KIDDER JOHN M. KUCHARSKI CHARLES R. LAMANTIA DAVID B. PERINI - ---------------------------------------------------- ------------------------------------------------ CHARLES R. LAMANTIA DAVID B. PERINI DENNIS J. PICARD BERNARD W. REZNICEK - ---------------------------------------------------- ------------------------------------------------ DENNIS J. PICARD BERNARD W. REZNICEK ROBERT E. WEISSMAN - ---------------------------------------------------- ROBERT E. WEISSMAN
EXHIBIT INDEX EXHIBIT 3. ARTICLES OF INCORPORATION AND BY-LAWS 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, 1988 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) 3.3 Certificate of Designation, Preferences and Rights (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, 1991 and incorporated by reference) EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS 4.1 Rights Agreement dated as of September 15, 1988 between State Street Boston Corporation and The First National Bank of Boston, Rights Agent (filed with the Securities and Exchange Commission as Exhibit 4 to Registrant's Current Report on Form 8-K dated September 30, 1988 and incorporated by reference) 4.2 Amendment to Rights Agreement dated as of September 20, 1990 between State Street Boston Corporation and The First National Bank of Boston, Rights Agent (filed with the Securities and Exchange Commission as Exhibit 4 to Registrant's Quarterly Report on Form 10- Q for the quarter ended September 30, 1990 and incorporated by reference) 4.3 Indenture dated as of August 2, 1993 between State Street Boston Corporation and The First National Bank of Boston, as trustee (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) EXHIBIT 10. MATERIAL CONTRACTS Executive Compensation Plans and Agreements: 10.1 State Street Boston Corporation Long-Term Common Stock Incentive Program, 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, 1981 and incorporated by reference) 10.2 State Street Boston Corporation 1981 Stock Option and Performance Share Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 10.2 to Registrant's Annual Report on Form 10- K for the year ended December 31, 1981 and incorporated by reference) 10.3 State Street Boston Corporation 1984 Stock Option Plan (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) 10.4 State Street Boston Corporation 1985 Stock Option and Performance Share Plan (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) 10.5 Revised Forms of Termination Agreement with Executive Officers (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) 10.6 State Street Boston Corporation 1989 Stock Option Plan (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) 10.7 State Street Boston Corporation 1990 Stock Option and Performance Share Plan (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) 10.8 State Street Boston Corporation 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) 10.9 Individual Pension Agreement with Marshall N. Carter (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) 10.10 Individual Pension Agreement with A. Edward Allinson (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) 10.11 Supplemental Retirement Agreement with Norton Q. Sloan 10.12 Individual Pension Agreement with Albert E. Petersen 10.13 Termination Benefits Arrangement with Marshall N. Carter 10.14 State Street Global Advisor's Incentive Plan for 1993 10.15 State Street Global Advisor's Incentive Plan for 1994 10.16 Senior Executives Annual Incentive Plan 10.17 1994 Stock Option and Performance Unit Plan EXHIBIT 11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 11.1 State Street Boston Corporation Computation of Earnings Per Share EXHIBIT 12. STATEMENT RE COMPUTATION OF RATIOS 12.1 Statement of ratio of earnings to fixed charges. EXHIBIT 13. PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS 13.1 Five Year Selected Financial Data. 13.2 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Years Ended December 31, 1993 (not covered by the Report of Independent Public Accountants). 13.3 Letter to Stockholders. 13.4 State Street Boston Corporation Consolidated Financial Statements and Schedules. EXHIBIT 21. SUBSIDIARIES 21.1 Subsidiaries of State Street Boston Corporation EXHIBIT 23. CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Independent Auditors EX-10 2 MATERIAL CONTRACTS EXHIBIT 10.11 SUPPLEMENTAL RETIREMENT AGREEMENT THIS AGREEMENT is made as of March 1, 1987 (the "Effective Date") by and between STATE STREET BOSTON CORPORATION, a Massachusetts corporation (the "Company"), and NORTON Q. SLOAN of Ipswich, Massachusetts ("Sloan"). WHEREAS, Sloan has been retained by the Company to serve as its Executive Vice President, such service beginning on the Effective Date; and WHEREAS, in order to effect such employment, Sloan has terminated his employment with Cabot Corporation, by which he had been employed since August 1, 1964, and has given up certain benefits under Cabot Corporation's pension plan to which he would have been entitled had he remained in the employ of Cabot Corporation until retirement; and WHEREAS, the Company wishes to provide Sloan with certain additional retirement benefits, as set forth herein, as an inducement for Sloan to enter and remain in employment with the Company, to compensate him in part for the Cabot Corporation pension benefits lost by reason of his acceptance of employment with the Company, and to provide certain retirement benefits which cannot be provided through the Company's normal retirement programs because of the operation of Section 415 and Section 401(a)(17) of the Internal Revenue Code of 1986; NOW, THEREFORE, the Company and Sloan agree as follows: ARTICLE 1 - DEFINITIONS Wherever used herein the following terms have the meanings set forth below, unless a difference meaning is clearly required by the context: 1.1 "Cabot Plan" means the "Retirement Income Plan for Employees of Cabot Corporation (October 1, 1985 Restatement)," a copy of which is attached hereto as Appendix A. 1.2 "Cabot Plan Benefit" means the benefit actually payable under the Cabot Plan based upon Sloan's actual service with and compensation from Cabot Corporation, which benefit is used as an offset hereunder. For purposes of Article 2(b) hereof, the Cabot Plan Benefit shall be expressed as the monthly benefit payable to Sloan if such benefit were payable as a joint and 50% survivor annuity with his wife commencing on February 1, 2002. For purposes of Articles 3(b), 3(ii), and 4(b) hereof, the Cabot Plan Benefit shall be computed as described in the preceding sentence and then reduced, if payments begin under Article 3 or 4 before February 1, 2002, to the amount of benefit that would be payable under the Cabot Plan in the same form beginning on the date such payments begin. 1.3 "Disability" means a medically determinable physical or mental impairment of Sloan which can be excepted to be of long, continued and indefinite duration and which prevents him from engaging in any substantial gainful employment. 1.4 "Plan" means the "Retirement Plan for Employees of State Street Boston Corporation and Certain Related Companies," as in effect on the Effective Date, a copy of which is attached hereto as Appendix B. 1.5 "Plan Benefit" means the benefit actually payable under the Plan based upon Sloan's actual service with and compensation from the Company, which benefit is used as an offset hereunder. For purposes of Article 2(b) hereof, the Plan Benefit shall be expressed as the monthly benefit payable to Sloan if such benefit were payable as a joint and 50% survivor annuity with his wife commencing on February 1, 2002. For purposes of Articles 3(b), 3(ii), and 4(b) hereof, the Plan Benefit shall be computed as described in the preceding sentence and then reduced, if payments begin under Article 3 or 4 before February 1, 2002, to the amount of benefit that would be payable under the Plan in the same form beginning on the date such payments begin. Capitalized terms which are not defined herein shall have the meaning assigned to them under the Plan. References herein to Sloan's wife shall refer to his wife as of the Effective Date. ARTICLE 2 - NORMAL RETIREMENT BENEFIT If Sloan continues to be employed by the Company until January 18, 2002, the Company will pay him a monthly retirement benefit equal to: (a) the amount determined under Section 6.01 of the Plan, determined (1) as if Sloan had the number of years of Accrual Service actually credited to him under the Plan plus an additional 22.583 years of Accrual Service, (2) as if Sloan's Annual Compensation under the Plan as of July 1 in each of the years 1982 through 1986 (the highest 5 years before the Effective Date) were the amount set forth in Appendix C, (3) without regard to any limitations imposed by Section 6.05 or 6.06 of the Plan, (4) without regard to any Plan limitation on Annual compensation to be used in determining benefits or any limitation imposed by Internal Revenue Code Section 401(a)(17) or any successor thereto, and (5) without reduction on account of any survivor benefit protection for Sloan's wife, reduced by (b) the sum of Sloan's Plan Benefit and his Cabot Plan Benefit. Such monthly benefit shall become payable on the first day of the first month following the termination of Sloan's employment with the Company and shall continue for Sloan's life. Upon Sloan's death, the Company shall continue monthly payments to Sloan's wife, if she survives him, for her life, in an amount equal to one-half the amount being paid to Sloan under this Article 2 prior to his death. ARTICLE 3 - EARLY RETIREMENT BENEFIT; DISABILITY BENEFIT If Sloan's employment with the Company should terminate, for any reason other than death or Disability, on or after January 18, 1992, but prior to January 18, 2002, the Company shall pay Sloan a monthly retirement benefit commencing at the same time as Sloan's Plan Benefit (or, if Sloan is not entitled to a Plan Benefit, commencing at the same time as Sloan's Cabot Plan Benefit) and continuing for Sloan's life, in an amount equal to: (a) the amount determined under Section 6.04(a) of the Plan, reduced as provided in Section 6.04(b) of the Plan in the event payments hereunder begin before February 1, 2002, determined (1) as if Sloan had the number of years of Accrual Service and Vesting Service actually credited to him under the Plan plus an additional 22.583 years of Accrual Service and Vesting Service, (2) as if Sloan's Annual Compensation under the Plan as of July 1 in each of the years 1982 through 1986 (the highest 5 years before the Effective Date) were the amount set forth in Appendix C, (3) without regard to any limitations imposed by Section 6.05 or 6.06 of the Plan, (4) without regard to any Plan limitation on Annual compensation to be used in determining benefits or any limitation imposed by Internal Revenue Code Section 401(a)(17) or any successor thereto, and (5) without reduction on account of any survivor benefit protection for Sloan's wife, reduced by (b) the sum of Sloan's Plan Benefit and his Cabot Plan Benefit. If Sloan's employment with the Company should terminate at any time before January 18, 2002, by reason of Disability, the Company shall pay Sloan a monthly retirement benefit commencing on such date subsequent to this termination of employment and on or before February 1, 2002, as Sloan shall designate by written notice to the Company, and continuing for Sloan's life, in an amount equal to: (i) the amount determinated by Section 6.04(a) of the Plan, reduced as provided in Section 6.04(b) of the Plan in the event payments hereunder begin before February 1, 2002, determined (1) as of Sloan had the number of years of Accrual Service and Vesting Service which he would have had under the Plan had he continued in employment until the benefit commencement date, plus an additional 22.583 years of Accrual Service and Vesting Service, (2) as if Sloan's Annual Compensation under the Plan as of July 1 in each of the years 1982 through 1986 (the highest five years before the Effective Date) were the amounts set forth in Appendix C, and as if his Annual Compensation under the Plan for the period from his termination of employment to the benefit commencement date were at a rate equal to his Average Annual Compensation as of his actual termination of employment, as determined under the Plan but giving effect to the preceding assumption, (3) without regard to any limitations imposed by Section 6.05 or 6.06 of the Plan, (4) without regard to any Plan limitation on Annual compensation to be used in determining benefits or any limitation imposed by Internal Revenue Code Section 401(a)(17) or any successor thereto, and (5) without reduction on account of any survivor benefit protection for Sloan's wife, reduced by (ii) the sum of Sloan's Plan Benefit and his Cabot Plan Benefit. Upon Sloan's death, the Company shall continue monthly payments to Sloan's wife, if she survives him, for her life, in an amount equal to one-half the amount being paid to Sloan under any provision of this Article 3 prior to his death. ARTICLE 4 - PRE-RETIREMENT TERMINATION In the event that Sloan's employment with the Company should terminate prior to January 18, 1992 for any reason other than death or Disability, the Company shall make monthly payments to Sloan commencing at the same time as Sloan's Plan Benefit (or, if Sloan is not entitled to a Plan Benefit, commencing at the same time as Sloan's Cabot Plan Benefit) and continuing for Sloan's life, in an amount equal to: (a) the amount determined under Section 7.01(a) of the Plan, reduced as provided in Section 7.02 of the Plan in the event of commencement before February 1, 2002, determined (1) as if Sloan had the number of years of Accrual Service and Vesting Service actually credited to him under the Plan plus an additional 22.583 years of Accrual Service and Vesting Service, (2) as if Sloan's Annual Compensation under the Plan as of July 1 in each of the years 1982 through 1986 (the highest 5 years before the Effective Date) were the amount set forth in Appendix C, (3) without regard to any limitations imposed by Section 6.05 or 6.06 of the Plan, (4) without regard to any Plan limitation on Annual compensation to be used in determining benefits or any limitation imposed by Internal Revenue Code Section 401(a)(17) or any successor thereto, and (5) without reduction on account of any survivor benefit protection for Sloan's wife, reduced by (b) the sum of Sloan's Plan Benefit and his Cabot Plan Benefit. Upon Sloan's death, the Company shall continue monthly payments to Sloan's wife, if she survives him, for her life, in an amount equal to one-half the amount being paid to Sloan under this Article 4 prior to his death. ARTICLE 5 - DEATH BEFORE BENEFITS BEGIN If Sloan should die prior to February 1, 2002 while employed by the Company, the Company shall pay to his wife, if she survives him, for her life, a monthly benefit commencing on the first day of the first month following the month of Sloan's death, equal to 62.5% of the amount which would have been payable to Sloan under the provisions of Article 2 hereof had he continued in employment with the Company until January 31, 2002. For purposes of this computation, Average Annual Compensation shall be determined as if Sloan's compensation had continued until January 31, 2002, at the rate in effect immediately prior to his death. In the event Sloan should die after termination of his employment and prior to commencement of benefit payments under Article 2, 3 or 4 hereof, the Company shall pay to Sloan's wife, if she survives him, for her life, beginning on the first day of the month after the later of (a) the month of Sloan's death or (b) January, 1992, a monthly amount equal to one-half the amount which would have been payable to Sloan under Article 2, 3 or 4 beginning on the same day if he had survived to that day and his benefit payments had begun on that day. ARTICLE 6 - ADJUSTMENTS FOR CHANGES IN PLANS AND BENEFITS The benefits provided hereunder are intended to be supplemental to benefits provided under the Plan and the Cabot Plan. Accordingly, no adjustment shall be made in any benefits payable hereunder to Sloan or his wife because of any changes in the benefit formula (or the manner of computing benefits) under the Plan or the Cabot Plan which occur before payments begin under this Agreement. However, any such change which results in a change in the amount of the Plan Benefit or the Cabot Plan Benefit shall be taken into account for purposes of applying any offset to any payment due hereunder. If at any time after Sloan or his wife has begun to receive payments under this Agreement there is a general increase in benefits payable under the Plan to retired employees and their beneficiaries, then the Company shall increase its payments under this Agreement to the extent necessary so that the combined increase under the Plan and this Agreement will equal the benefit increase which would have been received under the Plan if Sloan's benefit under the Plan had been determined as described in Article 2(a), 3(a), 3(i) or 4(a) above. Any increase in Sloan's Cabot Plan Benefit which takes effect after the commencement of payments under this Agreement shall not be taken into account as an offset for purposes of this Agreement. ARTICLE 7 - NOTICES Any notice or other communication pursuant to this Agreement shall be in writing and shall be sent by certified or registered mail addressed to the respective parties as follows: If to the Company, to: STATE STREET BOSTON CORPORATION Retirement Committee c/o Kenneth Stuart P.O. Box 351 Boston, Massachusetts 02101 If to Sloan to: NORTON Q. SLOAN P.O. Box 570 Ipswich, Massachusetts 01938 or to such other address as the party in question shall have designated by notice to the other party given in accordance with this Article. Any notice or other communication shall be deemed to have been duly given if personally delivered or mailed via registered or certified mail, postage prepaid, return receipt requested. ARTICLE 8 - ADMINISTRATIVE PROVISIONS No modification or waiver of this Agreement or any provision hereof shall be binding upon the party against whom enforcement of such modification or waiver is sought unless it is made in writing and signed by or on behalf of both parties hereto. This Agreement shall be subject to and construed in accordance with the laws of the Commonwealth of Massachusetts. The waiver by either party of a breach of any provision of this Agreement by a party shall not operate and be construed as a waiver or a continuing waiver by that party of the same or any subsequent breach of any provision of this Agreement by the other party. If any provisions of this Agreement or the application thereof to any person or circumstance shall be determined to be invalid or unenforceable to any extent, the remainder hereof, or the application of such provision to persons or circumstances other than those as to which it is so determined to be invalid or unenforceable, shall not be affected thereby, and each provision hereof shall be valid and shall be enforced to the fullest extent permitted by law. This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, executors and administrators, successors and assigns. This Agreement shall not be assignable in whole or in part by either party, except that the Company may assign this Agreement to and it shall be binding upon any parent, subsidiary or affiliate of the Company or any person, firm or corporation with which the Company may be merged or consolidated or which may acquire all or substantially all of the assets of the Company. Nothing in this Agreement will be construed to create a trust or to obligate the Company to segregate a fund, purchase an insurance contract, or in any other way currently to fund the future payment of benefits hereunder, nor will anything herein be construed to give Sloan or any other person rights to any specific assets of the Company. STATE STREET BOSTON CORPORATION Date 12/7/87 By DAVID SPINA ------------- -------------------- Treasurer Date 12/3/87 By NORTON Q. SLOAN ------------- -------------------- NORTON Q. SLOAN EX-10 3 MATERIAL CONTRACTS EXHIBIT 10.12 INDIVIDUAL PENSION AGREEMENT FOR A. E. PETERSEN The State Street Boston Corporation (the "Bank") maintains the State Street Boston Retirement Plan ("Retirement Plan"). The bank also maintains the Supplemental Executive Retirement Plan ("SERP"), as amended from time to time, which establishes the retirement benefit you are eligible for as a supplement to the benefit you are entitled to under the terms of the Retirement Plan. Nothing herein shall modify or amend any benefit or supplemental benefit payable under the Retirement Plan or SERP and nothing herein shall act to modify any term of the Retirement Plan or SERP. With effect from August 1, 1991, State Street Boston Corporation agrees to provide you with an additional benefit in accordance with the terms of this letter: 1. AMOUNT OF ADDITIONAL BENEFIT. The benefit shall be calculated as if a contribution had been made to the Retirement Plan in the following percentages of your Base Compensation under the Retirement Plan: Additional Pension Contribution Year As a Percent of Base Compensation 1 5.00% Each Subsequent Year 2.50% For purposes of this calculation, a year shall have the same meaning as a Year of Service under the Retirement Plan, provided that 1991 shall be considered a year notwithstanding any term of the Retirement Plan. Further for purposes of this calculation, your Base Compensation shall be calculated in accordance with the terms of the Retirement Plan, but notwithstanding any limitation on includible compensation or maximum benefit accruals imposed by the Internal Revenue Code upon qualified plans. 2. FORM AND PAYMENT OF BENEFIT. The benefit provided for in this Agreement will be payable at the same time and in the same form as benefit payments from the Retirement Plan. Your election as to the form and commencement of your Retirement Plan benefit shall automatically apply to the payment of any benefit hereunder. Any consent or waiver effected by you or your spouse under any provision of the Retirement Plan will automatically operate as a consent or waiver to benefits hereunder. 3. NON-ASSIGNMENT. The right to benefits hereunder shall not be assignable and neither you, your spouse or any designated beneficiary under the Retirement Plan shall be entitled to have such benefits made or commuted otherwise than in accordance with Section 2. 4. VESTING. Your benefits hereunder shall vest fully on August 1, 1996 or such later date upon which you will have completed five Years of Service as such term is defined in the Retirement Plan. Thereafter, all accruals shall vest immediately. 5. MISCELLANEOUS. This agreement does not create a trust or require current funding. This Agreement can be amended at any time by mutual written agreement between you and the Bank. This agreement shall be governed according to the laws of the Commonwealth of Massachusetts and you agree to bring any action related hereto in a court sitting in the Commonwealth. State Street Boston Corporation By: K. D. Stuart 4/5/92 ------------------------------- ------ K. D. Stuart, S.V.P. Date Human Resources, its Authorized Representative Albert E. Petersen ------------------------------- ------ Albert E. Petersen Date EX-10 4 MATERIAL CONTRACTS EXHIBIT 10.13 TO: Marshall N. Carter In the event that your employment at State Street Boston Corporation (the Bank) is terminated before July 22, 1996 for reasons other than 1) your resignation due to your, unilateral, decision to take other employment or for personal reasons, or 2) due to your death, or 3) termination for malfeasance, the Bank will pay you severance pay equal to eighteen months salary. The salary rate will be the monthly rate in effect on the effective date of termination. The potential receipt of any other forms of compensation or benefits, (e.g. stock options, performance shares) will be determined by agreements or contracts pertaining to each which may be in existence at the time of termination. /S/ W. S. EDGERLY -------------- W. S. Edgerly cc: K. D. Stuart EX-10 5 MATERIAL CONTRACTS EXHIBIT 10.14 STATE STREET GLOBAL ADVISORS INCENTIVE COMPENSATION PLAN - 1993 I. Purpose: The purpose of the plan is to provide all employees significant incentive to enhance the financial performance of State Street Global Advisors. II. Participation: The plan will consist of two separate and distinct parts. One part will cover all non-officers of State Street Global Advisors who have a minimum of six months of tenure with SSGA. The second part will cover all officers of State Street Global Advisors. III. Bonus Pools: The pool will be generated by contributions that are based on 1993 Global Advisors Contribution achievement after the revenue sharing related to the agreement between the Bank and State Street Global Advisors. For the year 1993 revenue sharing has been agreed at a rate of TBD% of Adjusted Revenues. (The basis for the Bonus Pool may be modified by the Chief Executive Officer of State Street Boston Corporation based on final data.) The Bonus Pool will consist of two parts, non-officer and officer. The split of the Pool into the two parts will be calculated according to the following formula: IV. Bonus Awards: All non-officers who are meeting job standards will be eligible to receive awards equal to 10% of their January 1, 1993 salary if the Global Advisors Contribution is $TBD. If the Global Advisors Contribution is greater than $TBD, non-officers will be eligible for additional awards. The amounts will be determined based on the non-officer's contribution. All awards will be paid in February 1994. All officers who are meeting job standards are eligible for awards based on their contribution. Officers will receive 70% of their award in February, 1994, the other 30% will be December 16, 1992 deferred and paid in equal portions in February, 1995 and February, 1996. Deferred awards will earn interest at a rate equal to the effective yield to maturity, respectively, on the one and two year U.S. Treasury notes with an issue date closest to February 18, 1994. In no case will the sum of the awards exceed the Bonus Pool. A manager with the approval of the Chief Executive Officer of State Street Global Advisors may make adjustments to the awards to reflect a participant's contribution or the business environment. All awards are subject to the approval of the Chief Executive Officer of State Street Global Advisors, the Chief Executive Officer and the Executive Compensation Committee of State Street Boston Corporation. If a participant ceases to be employed by State Street Global Advisors, or State Street Bank and Trust Company or one of its subsidiaries, (provided, however, that this provision shall not apply if the participant's employment is terminated by reason of death or disability) prior to the date of actual payment of any incentive or deferral, no payment shall be made. December 4, 1992 EX-10 6 MATERIAL CONTRACTS EXHIBIT 10.15 STATE STREET GLOBAL ADVISORS INCENTIVE COMPENSATION PLAN - 1994 I. Purpose: The purpose of the plan is to provide all employees significant incentive to enhance the financial performance of State Street Global Advisors and State Street Boston Corporation. II. Participation: The plan will consist of two separate and distinct parts. One part will cover all non-officers of State Street Global Advisors who have a minimum of six months of tenure with SSGA. The second part will cover all officers of State Street Global Advisors. III. Bonus Pools: The pool will be generated by contributions that are based on 1994 Global Advisors Financial Achievement after the revenue sharing related to the agreement between State Street Bank and Trust Company and State Street Global Advisors. For the year 1994 revenue sharing has been agreed at a rate of TBD% of Adjusted Revenues. The Bonus Pool will consist of two parts, non-officer and officer. The split of the Pool into the two parts will be calculated according to a formula determined by the Chief Executive Officer of State Street Global Advisors. IV. Bonus Awards: All non-officers who are meeting job standards will be eligible to receive awards if the Global Advisors Financial Achievement is $TBD. The amounts will be determined based on the non-officer's contribution. All awards will be paid in February 1995. All officers who are meeting job standards are eligible for awards based on their contribution. Officers will receive 70% of their award in February, 1995, the other 30% will be deferred and paid in equal portions in February, 1996 and February, 1997. Deferred awards will earn interest at a rate equal to the effective yield to maturity, respectively, on the one and two year U.S. Treasury notes with an issue date closest to February 18, 1995. In no case will the sum of the awards exceed the Bonus Pool. All awards are subject to the approval of the Chief Executive Officer of State Street Global Advisors, the Chief Executive Officer and the Executive Compensation Committee of State Street Boston Corporation. If a participant ceases to be employed by State Street Global Advisors, or State Street Boston Corporation or one of its subsidiaries, (provided, however, that this provision shall not apply if the participant's employment is terminated by reason of death or disability) prior to the date of actual payment of any incentive or deferral, no payment shall be made. EX-10 7 MATERIAL CONTRACTS EXHIBIT 10.16 2/14/94 STATE STREET BOSTON CORPORATION 1994 SENIOR EXECUTIVES ANNUAL INCENTIVE PLAN I. Purpose: The purpose of the Plan is to provide additional incentive and reward to Senior Executives of State Street Boston Corporation (the "Company") to achieve targeted levels of earnings per share and return on equity. II. Eligibility: The Chief Executive Officer and members of the Chairman's Office are designated as Participants in the Plan. III. Performance Goals: The 1994 performance goals and bonus opportunities are as follows: 1. Earnings per share. The performance goal is $2.78 per fully diluted share of the Company ("EPS") at which each Participant will receive his or her maximum bonus. The maximum bonus on account of EPS is 37.5% of salary for the Chief Executive Officer and 25% of salary for each of the other Participants. The minimum goal is $1.79 EPS at which no bonus on account of EPS is payable. On EPS between $2.78 and $1.79 the bonus will be appropriately pro rated on a straight line basis. 2. Return on equity. The performance goal is an 18% average return on common stockholders' equity (ROE) at which each Participant will receive his or her maximum bonus. The maximum bonus on account of ROE is 37.5% of salary for the Chief Executive Officer and 25% of salary for each of the other Participants. The minimum goal is 12% ROE at which no bonus on account of ROE is payable. On ROE between 18% and 12% the bonus will be appropriately pro rated on a straight line basis. The average common stockholders' equity will be determined using the methodology regularly employed by the Company in its published reports. IV. Terms: A. This Plan is subject to the approval of the performance goals by stockholders at the 1994 Annual Meeting of Stockholders. B. Payment of bonuses will be made in cash after certification by the Committee that the payments conform to the performance goals. The Committee may defer the payment of all or a portion of any Participant's bonus. Determinations by the Committee shall be final and binding on the Company and the Participants. C. Extraordinary Items: Extraordinary items are those items treated as extraordinary in accordance with generally accepted accounting principles and, to the extent consistent with Section 162(m) of the Internal Revenue Code of 1986, shall be eliminated in determining net income under this Plan. D. The Committee may reduce or eliminate any bonus otherwise payable hereunder for any one or more of the Participants. E. To receive a bonus, a Participant must be an employee of the Company or one of its subsidiaries, at the time bonuses are approved by the Committee. EX-10 8 MATERIAL CONTRACTS EXHIBIT 10.17 STATE STREET BOSTON CORPORATION 1994 STOCK OPTION AND PERFORMANCE UNIT PLAN 1. PURPOSE The purpose of the 1994 Stock Option and Performance Unit Plan (the "Plan") is to advance the interests of State Street Boston Corporation and its Subsidiaries (the "Company") and its stockholders by authorizing the grant of Stock Options, Stock Appreciation Rights ("SARs") and Performance Units to certain Officers of the Company, thereby providing them with an incentive to devote their full abilities and industry to the success of the Company's business. Both Options intended to qualify as incentive stock options (as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code")) ("Incentive Stock Options"), and Options not intended to so qualify ("Nonqualified Options") may be granted under the Plan. 2. UNITS SUBJECT TO THE PLAN The number of shares of the Company's common stock, par value $1.00 per share (the "Common Stock"), that may be issued under the Plan shall not exceed three million five hundred thousand (3,500,000) shares, which is the number of shares to be reserved for issuance under the Plan. The number of Performance Units that may be issued under the Plan shall not exceed one million (1,000,000). To the extent consistent with continued qualification of the Plan under Section 422 of the Code and the performance-based remuneration provisions of Section 162(m) of the Code and the regulations thereunder, if any Option granted under the Plan shall terminate for any reason without having been exercised in full, the balance of the shares theretofore subject thereto shall again be available for the purposes of the Plan, except that such shares shall not be so available whenever such Option has been surrendered as a result of the exercise of a related SAR. To the extent consistent with qualification of the Plan under the performance based remuneration provisions of Section 162(m) of the Code and the regulations thereunder, if payment is not made for any reason with respect to any Performance Units, the shares theretofore subject to the performance shall again be available for the purposes of the Plan. The number of shares of Common Stock and Performance Units is subject to adjustment in accordance with Paragraph 10. 3. ADMINISTRATION A. The Committee. The Plan shall be administered by the Executive Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall be composed solely of three or more members of the Board of Directors who are "outside directors" under Section 162(m)(4)(C)(i) of the Code, and who are disinterested persons within the meaning of Rule 16b-3 of the Exchange Act. B. Committee Authority. Subject to the express provisions of the Plan, the Committee shall have the authority, in its discretion, to grant Options and SARs to Officers of the Company, to determine the number of shares covered by each such Option, to identify whether such Option is intended to qualify as an Incentive Stock Option, to determine the number of SARs and Performance Units to be granted, and to determine the terms of each such grant. In making such determinations, the Committee shall take into account the nature of the services rendered by the respective Officers, their present and potential contributions to the Company's success and such other factors as the Committee in its discretion shall deem relevant. Subject to the express provisions of the Plan, the Committee shall also have authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to its administration, to determine the terms and provisions of the respective granting agreements or other documents (which need not be identical in respect of each Officer) and to make all other determinations necessary or advisable for the administration of the Plan. The "non-Officer Directors" of the Board of Directors shall approve all grants (and the terms thereof) to Officers who are directors of the Company upon recommendation of the Committee. For purposes of the Plan, a Director is a non-Officer Director if he or she is both an "outside director" within the meaning of Code Section 162(m)(4)(C)(i) and a "disinterested person" within the meaning of Rule 16b-3 of the Exchange Act. 4. ELIGIBILITY AND LIMITATIONS Individuals eligible to receive awards under this Plan shall be such salaried officers as the Committee shall determine are in positions to contribute importantly to the success of the Company ("Officers"). No Officer shall be entitled to grants of (a) Options (including related SARs), whether or not exercised, in excess of an aggregate of five hundred thousand (500,000) shares over the term of the Plan, or (b) Performance Units intended to qualify for the performance-based exception to Section 162(m) of the Code in excess of an aggregate of two hundred fifty thousand (250,000) units over the term of the Plan, subject in each case to the provisions of Paragraph 10. 5. STOCK OPTIONS A. Option Price. The purchase price of the Common Stock under each Option shall be determined by the Committee, but shall be not less than the Fair Market Value as of the date of the grant of the Option. B. Exercise of Option. Subject to Paragraphs 8 and 14 hereof, an Option granted under the Plan shall become exercisable in whole or in part not less than one year after the date of grant and thereafter may be exercised in whole or in part at any time before it terminates according to the terms of the Option or under the provisions of the Plan. The Committee may, in its discretion, provide in the Option agreement for exercise in specific installments after the end of one year from the date of grant. In no case may an Option be exercised as to less than 50 shares at any one time, except when the number of remaining shares it covers is less than 50. The Committee shall be authorized to establish the manner and the effective date of the exercise of an Option. During an Optionee's lifetime, an Option may be exercised only by the Optionee or the Optionee's guardian or legal representative. C. Forms of Payment. In lieu of a cash payment to exercise an Option in whole or in part, an Optionee may tender shares of the Common Stock of the Company held for at least six months (or such other period as the Committee may approve) with a Fair Market Value equal to the exercise price of the Option being exercised. Unless the Committee determines otherwise, payment for any shares subject to an Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price, and, if required, the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. D. Termination of Option. No Option may be exercised to any extent after the Option terminates in any of the following ways: 1. Each Option shall terminate upon exercise of such Option or related SAR in the manner provided in the Plan. 2. Each Option shall terminate on the date to be determined by the Committee, which shall in no event be later than 10 years from the date of the Option grant. 3. Unless otherwise provided by the Committee, if an Officer's employment terminates by reason of death, disability (as determined by the Company), or retirement at or after the normal or early retirement age under any retirement plan or supplemental retirement agreement maintained by the Company or any Subsidiary prior to exercise, expiration, surrender or cancellation of the Option or any related SAR, the Option and the related SAR shall remain exercisable after the date of such termination of employment in accordance with the applicable Option agreement whether or not such Option was exercisable at the time of such termination, and the Option or the related SAR may be exercised by the Officer or the person or persons to whom the Officer's rights shall pass by will or by the applicable laws of descent or distribution at such time and to the same extent that the Option or related SAR would have been exercisable had the Officer's employment not terminated; provided, however, that, unless otherwise provided, the Option shall terminate on the later of (i) one (1) year after the Option first becomes exercisable (if the Option is exercisable in one installment) and one (1) year after the last installment first becomes exercisable (if the Option is exercisable in more than one installment), and (ii) one (1) year after the termination of employment. Unless otherwise determined by the Committee, if an Officer's employment terminates for any reason other than death, disability (as determined by the Company) or retirement prior to exercise, expiration, surrender or cancellation of the Option or the related SAR, (i) each such Option and related SAR not then exercisable shall terminate, (ii) each Option and the related SAR that is exercisable on the date of termination of employment shall terminate three (3) months from the date of such termination of employment, and (iii) if the Officer dies within the three-month period described in (ii), the Option and the related SAR shall expire one (1) year after the date of the Officer's termination, during which period the Option or the SAR may be exercised at any time by the person or persons to whom the Officer's rights shall pass by will or by the applicable laws of descent or distribution, but only to the extent it was exercisable on the date of such termination. In no event, however, may the provisions of this Paragraph 5D(3) cause an Option or related SAR to be exercised after the expiration date set out in the applicable Option or SAR agreement. 6. STOCK APPRECIATION RIGHTS A. Grant of SARs. SARs may be granted under the Plan upon such terms and conditions as the Committee may prescribe, provided that a SAR may be granted only in connection with an Option granted under the Plan. The holder of a SAR shall have a right to receive the Spread on the date on which the SAR is exercised. B. Exercise of SARs. 1. SARs shall be exercisable at such time or times as may be determined by the Committee and, in each case, at such time as the related Option is exercisable, provided that a SAR shall not be exercisable prior to the time the related Option could be exercised. 2. During an Officer's lifetime, a SAR may be exercised only by the Officer or the Officer's guardian or legal representative and only upon surrender of the related Option. Shares covered by such surrendered Options shall not be available for granting further Options under the Plan. 3. The Committee may impose other conditions upon the exercise of a SAR, including but not limited to a condition that the SAR may be exercised only in accordance with the rules and regulations adopted by the Committee from time to time. Such rules and regulations may govern the right to exercise SARs granted prior to the adoption or amendment of such rules and regulations as well as SARs granted thereafter. Without limiting the foregoing, the Committee may specify that SARs may be exercised by the holder or may be exercised automatically by the occurrence of an event, by the passage of time, or in any other way. C. Forms of Payment for SARs. Upon the exercise of a SAR and the surrender of the related Option, the Company shall give to the person exercising such SAR an amount equivalent to the Spread in cash, in shares of the Company's Common Stock, or in a combination thereof, as the Committee shall determine. Determination as to form of payment may be made at the time of granting the SAR, or any time thereafter, and may be changed from time to time. D. Limitation on Payments for SARs. Subject to Paragraph 6C above, the Committee may from time to time recommend, subject to Board approval, the maximum amount of cash or stock which may be given upon exercise of SARs in any year. Any such limitation on payments may be changed by the Committee from time to time with the approval of the non-Officer Directors of the Board provided that no such change shall require the holder to return to the Company any amount theretofore received upon the exercise of SARs. E. Termination of SARs. Unless otherwise terminated by the Committee, a SAR will terminate upon the termination of the related Option. F. Amendment, Suspension or Termination of SARs by the Board. Prior to or other than directly in connection with a Change of Control, the non-Officer Directors of the Board may at any time amend, suspend or terminate any SARs theretofore granted under the Plan, provided that the terms of any SAR after any amendment shall conform to the provisions of the Plan. 7. PERFORMANCE UNITS A. Grant of Performance Units. Performance Units may be granted by the Company under the Plan to Officers upon such terms and conditions as the Committee may determine consistent with this Paragraph 7. With respect to each grant of Performance Units, the Committee shall establish in accordance with Code Section 162(m), if applicable, the following: 1. The total number of Performance Units an Officer shall have the right to earn during the Performance Period. The maximum number of Performance Units that may be granted to any Officer in any grant intended to qualify for the performance-based exception to Section 162(m) with respect to any Performance Period shall, subject to the provisions of Paragraph 10, not exceed two hundred fifty thousand (250,000), which is the total number of Performance Units available to him or her over the term of the Plan, and in no event shall the total number of Performance Units awarded to all Officers exceed the aggregate number of Performance Units available under Paragraph 2. 2. The commencement date and the duration of a Performance Period. Except as otherwise provided by the Committee, the Performance Period shall be two fiscal years, and the last day of the second fiscal year of any Performance Period shall be the Maturity Date. In no case, however, shall a Performance Period be shorter than one fiscal year or longer than five fiscal years. 3. Performance Factors and Targets. An Officer will earn Performance Units based on the Company's performance during the Performance Period. Performance shall be measured based on one or more of the following Factors: (a) return on equity, (b) earnings per share, and (c) the Company's total shareholder return during the Performance Period compared to the total shareholder return of a market reference (e.g., the Standard & Poors 500, the Standard & Poors Financial Index). In connection with the grant of Performance Units, the Committee shall establish in writing specific Performance Targets in respect of each Factor; the relative weight to be accorded achievement of each Performance Target, and the market reference that will be used for purposes of (c) above. To the extent consistent with Section 162(m), the Committee may provide in the terms of an award that return on equity and earnings per share be adjusted in order to eliminate the effect of extraordinary items. Extraordinary items are those items treated as extraordinary in accordance with generally accepted accounting principles. B. Value of Performance Units. The value of one Performance Unit at Maturity Date shall be equal in value to the Fair Market Value of one share of Common Stock at said time, subject to any maximum value specified at the time of the grant. C. Form of Payment for Performance Units. Payment for Performance Units shall be made in cash equal to the Fair Market Value of a share of Common Stock after certification by the Committee consistent with Section 162(m) of the Code that the payment conforms to the Performance Targets and any other material terms of the grant. At the discretion of the Committee, payment for Performance Units may be made in a lump sum or in installments. Upon the election of the Officer, made prior to January 1 of the year in which the Maturity Date occurs, payment for Performance Units may be deferred upon such terms and conditions as the Committee may prescribe. Amounts deferred at the discretion of the Committee or in accordance with an election by an Officer shall earn interest annually at a rate equal to the effective yield to maturity on the 360-day Treasury bills with an issue date initially closest to the March 31st following the Maturity Date and with issue dates closest to March 31 of each succeeding year. In no event, however, shall the interest payable with respect to deferred Performance Unit payments be greater than the maximum interest rate, if any, permitted by Section 162(m) of the Code, the regulations thereunder or interpretations thereof. D. Termination of Performance Units. Except as provided in Paragraph 7C or in Paragraph 14, in the event that, prior to the end of the relevant Performance Period, the employment of an Officer holding Performance Units terminates for any reason, the Performance Units held by him or her shall be forfeited in their entirety, except that such Performance Units may be paid in whole or in part to such former employee or the person or persons to whom his or her rights under the Performance Units shall pass by will or by the applicable laws of descent and distribution, but only when, if and to the extent that the Committee shall so determine, consistent with Section 162(m) of the Code, if applicable; provided, however, that any payment for such Performance Units, as so determined, may be adjusted to take into account the time between the date the Officer's employment so terminated and the end of the Performance Period. 8. ACCELERATION AND CANCELLATION With respect to any Option or SAR that has been outstanding for at least six months, the Committee may, subject to the approval of the non-Officer Directors of the Board, but not without the consent of the Officer, (a) authorize the acceleration of any Option or SAR, and (b) authorize the cancellation of all or any portion of an Officer's Option (whether or not the Option is then exercisable) and the payment to such Officer of the Spread determined on the date of cancellation, such payment to be made in shares of the Company's Common Stock valued at the Fair Market Value. 9. USE OF PROCEEDS Proceeds from the sale of stock pursuant to Options granted under the Plan shall constitute general funds of the Company. 10. ADJUSTMENTS UPON CHANGES IN STOCK In the event the outstanding shares of Common Stock shall be changed into or exchanged for any other class or series of capital stock or cash, securities or other property pursuant to a recapitalization, reclassification, merger, consolidation, combination or similar transaction, then each Option shall thereafter become exercisable and each Performance Unit adjusted for the number and/or kind of capital stock and/or the amount of cash, securities or other property so distributed, into which the shares of Common Stock subject to the Option would have been changed or exchanged had the Option been exercised, or the payment for the Performance Unit would have been made, in full prior to such transaction, provided that, if the kind or amount of capital stock or cash, securities or other property received in such transaction is not the same for each outstanding share of Common Stock, then the kind or amount of capital stock or cash, securities or other property for which the Option shall thereafter become exercisable shall be the kind and amount so receivable per share by a plurality of the shares of Common Stock, and provided further that if necessary, the provisions of the Option or Performance Unit shall be appropriately adjusted so as to be applicable, as nearly as may be, to any shares of capital stock, cash, securities or other property thereafter issuable or deliverable upon exercise of the Option or payment of the Performance Unit. Appropriate adjustments shall also be made in the terms of SARs to reflect such changes and to modify any other terms of outstanding Performance Units on an equitable basis, including modifications of Performance Targets and changes in the length of Performance Periods. 11. NON-TRANSFERABILITY Unless otherwise provided by the Committee, Options, SARs or Performance Units granted under the Plan may not be transferred except by will or the laws of descent and distribution. 12. CONDITIONS OF GRANTS In the event that the employment of an employee holding any unexercised Option or SAR or any unearned Performance Units shall terminate, the rights of such employee to such Options, SARs or Performance Units shall be subject to the conditions that until any such Option or SAR is exercised or any such Performance Unit is earned, he or she shall (a) not engage, either directly or indirectly, in any manner or capacity as advisor, principal, agent, partner, officer, director, employee, member of any association, or otherwise, in any business or activity which is at the time competitive with any business or activity conducted by the Company or any of its direct or indirect subsidiaries, and (b) be available, unless the participant shall have died, at reasonable times for consultations at the request of the Company's management with respect to phases of the business with which the participant was actively connected during his or her employment. In the event that either of the above conditions is not fulfilled, the individual shall forfeit all rights to any unexercised Option or SAR or any unearned Performance Unit held as of the date of the breach of condition. Any determination by the Board of Directors that an individual is, or has, engaged in a competitive business or activity as aforesaid or has not been available for consultations as aforesaid shall be conclusive. Notwithstanding anything herein to the contrary, this Paragraph 12 shall be inapplicable following a Change of Control. 13. NO LOANS TO HOLDERS OF OPTIONS The Company may not directly or indirectly lend money to any individual for the purpose of assisting such individual to acquire or carry shares of Common Stock issued upon the exercise of Options granted under the Plan. 14. CHANGE OF CONTROL PROVISIONS A. Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control: 1. Acceleration of Options and SARs. Any Options and SARs outstanding as of the date such Change of Control is determined to have occurred, held by Optionees subject to Section 16 of the Exchange Act and Optionees who are parties to termination agreements with the Company, and which are not then exercisable shall become exercisable to the full extent of the original grant. Holders of Performance Units granted hereunder as to which the relevant Performance Period has not ended as of the date such Change of Control is determined to have occurred who are subject to Section 16 of the Exchange Act and holders who are parties to termination agreements with the Company shall be entitled at the time of such Change of Control to receive a cash payment per Performance Unit equal to the Fair Market Value of a share of the Company's Common Stock in the manner provided herein, on a pro rata basis, as measured by (a) the Company's performance against the Performance Target(s) in effect with respect to such Performance Unit awards as are outstanding at the time of the Change of Control and (b) the time elapsed over the Performance Period. 2. Optional Cash-Out. During the 60-day period from and after a Change of Control, with respect to an Option that is unaccompanied by a SAR, an Optionee subject to Section 16 of the Exchange Act shall, unless the Committee shall determine otherwise at the time of grant, have the right, in lieu of the payment of the full Option price of the shares of Common Stock being purchased under the Option and by giving written notice to the Company in form satisfactory to the Committee, to elect (within such 60-day period) to surrender all or part of the Option to the Company and to receive in cash an amount equal to the Spread on the date of exercise multiplied by the number of shares of Common Stock granted under the Option as to which the right granted by this Paragraph 14A(2) shall have been exercised; provided, however, that if the Change of Control is within six months of the date of grant of a particular Option to an Optionee who is subject to Section 16 of the Exchange Act no such election shall be made by such Optionee with respect to such Option prior to six months from the date of grant. However, if the end of such 60-day period from and after a Change in Control is within six months of the date of grant of an Option held by an Optionee who is subject to Section 16 of the Exchange Act and the Optionee so elects, such Option shall be cancelled in exchange for a cash payment to the Optionee, effected on the day which is six months and one day after the date of grant of such Option, as the case may be, equal to the Spread multiplied by the number of shares of Common Stock granted under the Option. 3. Requirement of Cash Settlement. A SAR related to an Option that does not qualify as an Incentive Stock Option which is exercised during the 60-day period from and after a Change of Control (i) held by an Optionee subject to Section 16 of the Exchange Act and which was granted at least six months prior to the date of exercise pursuant hereto, or (ii) held by an Optionee who is not subject to Section 16 of the Exchange Act shall be settled solely for cash at the Spread. 4. Restriction on Application of Plan Provisions Applicable in the Event of Termination of Employment. After a Change of Control, Options and SARs shall remain exercisable following a termination of employment other than by reason of death, disability (as determined by the Company) or retirement for seven (7) months following such termination or until expiration of the original terms of the Option or SAR, whichever period is shorter. 5. Restriction on Amendment. In connection with or following a Change of Control, neither the Committee nor the Board may impose additional conditions upon exercise or otherwise amend or restrict an Option, SAR or Performance Unit, or amend the terms of the Plan in any manner adverse to the holder thereof, without the written consent of such holder. Notwithstanding the foregoing, if any right granted pursuant to this Paragraph 14A would make a Change of Control transaction ineligible for pooling of interests accounting under applicable accounting principles that but for this Paragraph 14A would otherwise be eligible for such accounting treatment, the Committee shall have the authority to substitute stock for the cash which would otherwise be payable pursuant to this Paragraph 14A having a Fair Market Value equal to such cash. B. Definition of Change of Control. For purposes of the Plan, a "Change of Control" shall mean the happening of any of the following events: 1. An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following acquisitions of Outstanding Company Common Stock and Outstanding Company Voting Securities: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any Person pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Paragraph 14B; or 2. Individuals who, as of the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual who becomes a member of the Board subsequent to such effective date, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or 3. Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination"); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or such corporation resulting from such Business Combination) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or 4. The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. C. Fair Market Value; Spread. Notwithstanding any provision herein to the contrary, during the 60-day period from and after a Change of Control, "Fair Market Value" for purposes of (i) a SAR which is related to an Option that does not qualify as an Incentive Stock Option, (ii) a Performance Unit, or (iii) determinations under Paragraph 14A shall mean the higher of (A) the highest average of the reported daily high and low prices (as quoted in The Wall Street Journal or if The Wall Street Journal shall no longer publish such quotes, a newspaper having a national circulation) per share of the Common Stock during the 60-day period prior to the first date of actual knowledge by the Board of Directors of the Company of a Change of Control and (B) if the Change of Control is the result of a transaction or series of transactions described in Paragraph 14B(1) or (3), the highest price per share of the Common Stock paid in such transaction or series of transactions (which in the case of Paragraph 14B(1) shall be the highest price per share of the Common Stock as reflected in a Schedule 13D filed by the person having made the acquisition); provided, however, that with respect to an Optionee who is subject to Section 16 of the Exchange Act, if the Change in Control is within 240 days of the date of grant of an Option or SAR, then the Fair Market Value shall be in all cases the Fair Market Value of the Common Stock determined on the date such Option or SAR is exercised without regard to this Paragraph 14C. For purposes of the Plan during the 60-day period from and after a Change of Control, "Spread" means, with respect to a share of Common Stock, the excess of the Fair Market Value as defined in this Paragraph 14C over the Option exercise price. 15. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN The Board of Directors may at any time suspend or terminate the Plan and may amend it from time to time in such respects as the Board may deem advisable in order that Options, SARs and Performance Units granted thereunder shall conform to any change in, or interpretation of, applicable laws or regulations, or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without stockholder approval either before or after Board action (i) effectuate any change inconsistent with the qualification of awards as performance-based under Code Section 162(m) (unless the Committee determines that awards affected by such changes are not intended to qualify for the performance-based exception to Section 162(m) of the Code) or (ii) effectuate any other change for which stockholder approval is required in order for the Plan to continue to qualify for the award of Incentive Stock Options under Section 422 of the Code and to continue to qualify under Rule 16b-3 promulgated under Section 16 of the Exchange Act. Unless the Plan shall theretofore have been terminated by the Board of Directors, no awards may be granted under the Plan after April 30, 1999 and provided, further, that in connection with or following a Change of Control the Board of Directors may not suspend or terminate the Plan or amend the Plan in any manner adverse to the holder of an Option, SAR or Performance Unit hereunder without the written consent of such holder. Awards granted prior to that time may extend beyond that date according to Plan provisions and award terms. No Option, SAR or Performance Unit may be granted during any suspension or after termination of the Plan. No amendment, suspension or termination of the Plan shall, without the Optionee's consent, adversely affect the rights or obligations under any Option theretofore granted to him or her under the Plan. Except as provided above in Paragraph 14 and this Paragraph 15, any rights or obligations with respect to SARs or to Performance Units may be suspended or terminated, and rights or obligations with respect to SARs may be altered, without the consent of the holder. 16. DEFINITIONS AND OTHER GENERAL PROVISIONS A. Board of Directors. The term "Board of Directors" or "Board" means the Board of Directors of State Street Boston Corporation. B. Exchange Act. The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. C. Fair Market Value. For all periods other than during the 60-day period from and after a Change of Control, the term "Fair Market Value", when used in connection with Options and related SARs, means the value of a share of Common Stock equal to the average of the high and low prices on the date of the grant or the date of the exercise (whichever date is applicable), and when used in connection with Performance Units, means the value of a share of Common Stock equal to the average of the high and low prices on the ten trading days preceding the commencement of the Performance Period or the Maturity Date of the Performance Unit, or the value as determined by any other valuation method the Committee may establish. During the 60-day period from or after a Change of Control, "Fair Market Value" shall have the meaning specified in Paragraph 14. D. Option. The term "Option" means the right to purchase a share of the Company's Common Stock under the Plan. E. Person. "Person" shall mean any individual, group, corporation, partnership, company or other entity. F. Spread. For all periods other than during the 60-day period from and after a Change of Control, the term "Spread" means the excess of the Fair Market Value of a share of the Company's Common Stock over the option exercise price specified in the related Option. During the 60-day period from or after a Change of Control, "Spread" shall have the meaning specified in Paragraph 14. G. Subsidiary. The term "Subsidiary" shall mean any corporation, domestic or foreign other than the Company, of which 50% or more of the total combined voting power of all classes of stock is held by the Company or a subsidiary or subsidiaries thereof. H. Shares to be Delivered. The Common Stock issued under the Plan may consist either in whole or in part of shares of the Company's authorized but unissued Common Stock or shares of the Company's authorized and issued Common Stock reacquired by the Company and held in its treasury. No fractional shares of Common Stock shall be issued, and the Committee shall determine whether cash shall be given in lieu of such fractional shares or whether and how such fractional shares shall be eliminated. I. Employment. Options granted under the Plan shall not be affected by any change of employment so long as the holder continues to be an eligible employee of the Company. The Option agreements may contain such provisions as the Committee shall approve with reference to the effect of approved leaves of absence. Nothing in the Plan or in any grant pursuant to the Plan shall confer on any individual any right to continue in the employ of the Company or interfere in any way with the right of the Company to terminate the holder's employment at any time. J. Grants. Nothing contained in the Plan or in any resolution adopted by the Board of Directors, the Committee, or any other committee of the Board, or the holders of Common Stock of the Company or any action, except the specific granting of Options, SARs or Performance Units, shall constitute the granting of any award under the Plan. The granting of an award pursuant to the Plan shall take place as recommended by the Committee and approved by the non-Officer Directors of the Board with respect to Officers who are directors and by the Committee with respect to other Officers. Awards will be evidenced by written instruments. Such instruments may be in the form of agreements to be executed by both the Officer and the Company, or certificates, letters or similar instruments, which need not be executed by the Officer but acceptance of which will evidence agreement to the terms thereof. K. Rights as a Stockholder. The holder of an Option or a SAR or a person granted Performance Units shall have none of the rights of a stockholder with respect to the related stock until such stock has been issued to the holder. L. Withholding. The Company will withhold from any cash payment made pursuant to an award an amount sufficient to satisfy all federal, state and local withholding tax requirements. In the case of an award pursuant to which Common Stock may be delivered, the Committee will have the right to require that the Officer or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Common Stock. If and to the extent that such withholding is required, the Committee may permit the Officer or such other person to elect at such time and in such manner as the Committee provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Common Stock having a value, taken at Fair Market Value, calculated to satisfy the withholding requirement. If at any time an Incentive Stock Option is exercised the Committee determines that the Company could be liable for withholding requirements with respect to a disposition of the Common Stock received upon exercise, the Committee may require as a condition of exercise that the person exercising the Incentive Stock Option agree (i) to inform the Company promptly of any disposition (within the meaning of Section 424(c) of the Code) of Common Stock received upon exercise, and (ii) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. M. Other Plans. The adoption of the Plan shall not preclude the adoption by appropriate means of any other stock option or other incentive plan for employees. 17. EMPLOYEES ABROAD Options granted hereunder to Officers of the Company, or a Subsidiary, who reside outside the United States shall, at the discretion of the Committee, be subject to such additional terms and conditions as may be necessary or appropriate to qualify as an approved share option under the applicable laws and regulations of the country of residence. 18. EFFECTIVENESS OF THE PLAN The effective date of the Plan is December 16, 1993, the date of its adoption by the full Board subject to stockholder approval within 12 months after approval by the Board. Options, SARs and Performance Units may be granted prior to stockholder approval of the Plan but subject to such approval. If stockholder approval of the Plan is not obtained within said period the Plan shall terminate and any Options, SARs and Performance Units granted shall be null and void. EX-11 9 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 STATE STREET BOSTON CORPORATION COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31 ------------------------------------------------------- 1993 1992 1991 ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Primary: Average shares outstanding .............. 75,443,604 74,761,232 73,649,678 Common stock equivalents ................ 749,560 1,474,069 1,319,808 ----------- ---------- ---------- Primary shares outstanding .......... 76,193,164 76,235,301 74,969,486 ----------- ---------- ---------- ----------- ---------- ---------- Net income .............................. $179,829 $160,443 $139,270 ------- ------- ------- ------- ------- ------- Earnings Per Share - primary ............ $ 2.36 $ 2.10 $ 1.86 ------- ------- ------- ------- ------- ------- Fully diluted: Average shares outstanding .............. 75,443,604 74,761,232 73,649,678 Common stock equivalents ................ 749,560 1,738,055 1,798,392 Assumed conversion of 5% convertible notes ................................. 41,259 41,323 41,323 Assumed conversion of 734% convertible subordinated debentures ............... 942,079 1,157,163 1,626,582 ----------- ---------- ---------- Fully diluted average shares outstanding ....................... 77,176,502 77,697,773 77,115,975 ----------- ---------- ---------- ----------- ---------- ---------- Net income .............................. $179,829 $160,443 $139,270 Elimination of interest on 5% convertible notes and 734% convertible subordinated debentures less related income tax benefit ............................... 214 296 399 ------- ------- ------- Fully diluted net income ............ $180,043 $160,739 $139,669 ------- ------- ------- ------- ------- ------- Earnings Per Share - fully diluted ...... $ 2.33 $ 2.07 $ 1.81 ------- ------- ------- ------- ------- -------
EX-12 10 STATEMENT RE COMPUTATION OF RATIOS EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1993 1992 1991 1990 1989 ------- ------- ------- ------- ------- (A) Excluding interest on deposits: Earnings: Income before income taxes $278,887 $256,903 $225,125 $183,460 $163,480 Fixed charges .......... 182,061 186,877 181,160 236,176 224,488 ------- ------- ------- ------- ------- Earnings as adjusted ..... $460,948 $443,780 $406,285 $419,636 $387,968 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes: Pretax income from continuing operations as reported ............... $277,455 $256,561 $225,088 $183,460 $163,195 Share of pretax income (loss) of 50% owned subsidiary not included in above ............... 1,432 342 37 -- 285 ------- ------- ------- ------- ------- Net income as adjusted .......... $278,887 $256,903 $225,125 $183,460 $163,480 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges: Interest on other borrowings ............. $168,423 $169,905 $164,244 $222,553 $210,751 Interest on long-term debt including amortization of debt issue costs .... 10,022 13,324 13,238 9,918 10,008 Portion of rents representative of the interest factor in long term lease ............. 3,616 3,648 3,678 3,705 3,729 ------- ------- ------- ------- ------- Fixed charges ...... $182,061 $186,877 $181,160 $236,176 $224,488 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of earnings to fixed charges .................. 2.53x 2.37x 2.24x 1.78x 1.73x (B) Including interest on deposits: Adjusted earnings from (A) above .................... $460,948 $443,780 $406,285 $419,636 $387,968 Add interest on deposits ... 202,810 248,851 286,751 314,190 210,590 ------- ------- ------- ------- ------- Earnings as adjusted ....... $663,758 $692,631 $693,036 $733,826 $598,558 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges: Fixed charges from (A) above .................. $182,061 $186,877 $181,160 $236,176 $224,488 Interest on deposits ..... 202,810 248,851 286,751 314,190 210,590 ------- ------- ------- ------- ------- Adjusted fixed charges ..... $384,871 $435,728 $467,911 $550,366 $435,078 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Adjusted earnings to adjusted fixed charges ... 1.72x 1.59x 1.48x 1.33x 1.38x
EX-13 11 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 FIVE YEAR SELECTED FINANCIAL DATA S E L E C T E D F I N A N C I A L D A T A State Street Boston Corporation
Compound (Dollars in millions, Growth Rate except per share data) 1993 1992 1991 1990 1989 1988 88-93 OPERATING RESULTS (1) Fee revenue ...................... $ 833.4 $ 702.9 $ 563.9 $ 502.9 $ 443.6 $ 397.5 16% Gain on sale of credit card loan portfolio (1) ............... 56.2 Interest revenue - taxable equivalent....................... 719.2 728.0 756.5 838.3 663.8 515.4 7 Interest expense ................. 381.3 432.1 464.2 546.7 431.3 299.7 5 Net interest revenue - taxable equivalent....................... 337.9 295.9 292.3 291.6 232.5 215.7 9 Provision for loan losses ........ 11.3 12.2 60.0 45.7 19.4 15.6 (6) Total revenue ................... 1,160.0 986.6 852.4 748.8 656.7 597.6 14 Operating expenses ............... 862.3 716.4 608.5 544.6 478.0 437.0 15 Income before income taxes on a taxable equivalent basis .. 297.7 270.2 243.9 204.2 178.7 160.6 13 Income taxes ................ 97.6 96.1 85.8 66.1 59.2 52.2 Taxable equivalent adjustment .... 20.3 13.7 18.8 20.8 15.5 16.1 Net Income ...................... $ 179.8 $ 160.4 $ 139.3 $ 117.3 $104.0 $ 92.3 14 PER SHARE (2) Earnings (1): Primary ......................... $ 2.36 $ 2.10 $ 1.86 $ 1.59 $ 1.42 $ 1.25 14 Fully diluted ................... 2.33 2.07 1.81 1.55 1.38 1.20 14 Cash dividends declared .......... .520 .445 .385 .340 .300 .260 15 Book value at year end ........... 14.56 12.70 10.97 9.51 8.29 7.22 15 Closing price .................... 37.50 43.75 32.13 17.44 19.63 13.25 23 ANNUAL AVERAGES Interest-earning assets .......... $ 16,222 $13,854 $10,131 $ 8,947 $6,953 $6,144 21 Total assets ..................... 18,169 15,502 11,574 10,233 8,089 7,246 20 Noninterest-bearing deposits ..... 3,623 2,952 2,460 2,301 2,218 2,101 12 Long-term debt ................... 122 146 146 114 117 124 -- Stockholders' equity ............. 1,033 887 773 647 555 494 l6 RATIOS Return on equity ................. 17.4% 18.1% 18.0% 18.1% 18.7% 18.7% Return on assets ................. .99 1.03 1.20 1.15 1.29 1.27 Total risk-based capital ......... 12.7 14.6 16.4 15.1 15.3 15.7 Internal capital generation rate . 13.6 14.3 14.3 14.3 14.9 14.9 Leverage ......................... 5.3 5.9 6.2 6.2 6.7 6.7 Employees at year end ............ 10,117 9,338 8,321 8,129 7,624 7,298 7 - ------------- (1) Results for 1991 include a non-recurring gain on sale of the credit card loan portfolio, which increased net income $32.6 million, equal to $.44 primary and $.43 fully diluted per share. (2) Per share amounts for 1988 to 1991 have been restated to reflect a two-for-one stock split distributed in 1992.
EX-13 12 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE 3 YEARS ENDED DECEMBER 31, 1993 F I N A N C I A L R E V I E W State Street Boston Corporation This section provides a discussion and analysis of State Street Boston Corporation's consolidated results of operation for the three years ended December 31, 1993, its financial condition at year-end 1993, and its approach to risk management. It should be read in conjunction with the Financial Statements and Supplemental Financial Data. RESULTS OF OPERATIONS SUMMARY In 1993, earnings per share were $2.33 on a fully diluted basis, up $.26, or 13%, from $2.07 in 1992. Net income was $179.8 million, up from $160.4 million a year ago. Return on stockholders' equity was 17.4%, compared with 18.1% in 1992. In 1993, State Street continued to grow rapidly while increasing the level of strategic spending. The growth rate of total revenue was 18%, which was higher than the growth rate in the last several years. Assets of current customers grew from additional funding and market appreciation. State Street also attracted new customers and provided additional services to existing customers. A high customer retention rate and a broad, integrated product line serve as a base for future revenue growth. The principal markets State Street serves are dynamic and growing. In 1993, State Street benefitted particularly from the continued, rapid growth of the mutual fund industry and from increased cross-border investing by customers. Total revenue grew $173.4 million to $1.2 billion, driven primarily by a $130.5 million, or 19%, increase in fee revenue. Total revenue is defined as fee revenue plus taxable equivalent net interest revenue, less the provision for loan losses.In 1993, fee revenue accounted for an increasing proportion of total revenue, reaching 72%, among the highest percentages of major banking companies. Fiduciary compensation, the largest component of fee revenue, was $627.8 million, up $82.4 million, or 15 %, and foreign exchange trading revenue was $82.7 million, up $24.8 million, or 43%. Taxable equivalent net interest revenue was $337.9 million, up $42.0 million, or 14%, over 1992. Net interest revenue reflected the benefit of growth in the balance sheet and a wider spread between interest rates earned and paid, which were partially offset by the effect of lower asset yields. Operating expenses were $862.3 million and grew $145.9 million, or 20%, supporting growth and a higher level of strategic investment spending in information technology, product and market development, and the core processing infrastructure. Strategic investment spending equaled 10% of revenue. In 1993, State Street increased its rate of spending on strategic investments to strengthen its leadership position in the markets in which it participates and to position it for future growth. The increase in the U.S. corporate income tax rate for 1993 lowered reported earnings per share for the year by $.03. FEE REVENUE In 1993, fee revenue was $833.4 million, up $130.5 million, or 19%, over 1992, primarily from growth in fiduciary compensation. The following table shows the categories of fee revenue: - ----------------------------------------------------------------------------------------------------------------
FEE REVENUE Compound Growth Change Rate (Dollars in millions) 1993 1992 1991 1990 1989 1988 92-93 88-93 - ---------------------------------------------------------------------------------------------------------------- Fiduciary compensation........... $627.8 $545.4 $442.5 $381.3 $336.3 $292.8 15% 16% Foreign exchange trading ........ 82.7 57.9 39.3 33.0 28.9 23.4 43 29 Processing service fees ......... 46.1 30.4 19.8 20.2 26.3 23.2 52 15 Service fees .................... 40.0 31.3 23.3 18.1 16.2 15.1 28 22 Securities gains (losses), net .. 15.4 12.3 3.3 .2 (3.9) 1.0 25 73 Bank card fees .................. 4.3 4.9 13.3 26.5 26.5 24.6 (12) (29) Other............................ 17.1 20.7 22.4 23.6 13.3 17.4 (17) -- Total fee revenue......... $833.4 $702.9 $563.9 $502.9 $443.6 $397.5 19 16
FINANCIAL REVIEW State Street Boston Corporation FIDUCIARY COMPENSATION. The largest component of fee revenue, fiduciary compensation, increased $82.4 million, or 15%, to $627.8 million in 1993. Growth in fiduciary compensation in 1993 came from the growth of current customers and their use of additional and more complex services. The installation of new customers also added to revenue and serves as a base for future growth. In 1993, pricing pressure on the basic custody and accounting services for large pools of assets partially subsided. While State Street's custody capabilities attract customers, less than 30% of fiduciary revenue is derived from mutual funds for whom State Street provides only basic custody, and custody and portfolio accounting for customers other than mutual funds. Fiduciary compensation is derived from accounting, custody, information, investment management and trusteeship services. The fee charged is negotiated and is usually based on the volume of assets under custody or management, the number of securities held, portfolio transactions, income collected and other value-added services such as securities lending and pricing. Asset-based fees are usually on a sliding scale; as the assets in a portfolio under management or custody grow, due to market value changes or cash inflows, State Street's fee may be a smaller percentage of those assets. Thus, changes in portfolio size do not always have a corresponding impact on State Street's revenue. State Street's revenue is becoming less sensitive to changes in prices of securities because of the broadening range of services used by customers. A decreasing percentage of total revenue is derived from asset-based fees. If equity values worldwide were to increase or decrease 10%, State Street estimates that this, by itself, would cause less than a 1% change in total revenue. Similarly, if bond values were to change by 10%, less than a 1% change in total revenue is anticipated. In addition to fiduciary revenue, certain financial asset services customers generate other types of fee revenue, particularly foreign exchange trading revenue, and net interest revenue. Noninterest-bearing deposits from these customers comprise about 85% of total noninterest-bearing deposits available for investment. These customers also invest substantial short-term funds with State Street in the form of foreign deposits and other liabilities, particularly repurchase agreements. Revenue from investing these deposits and funds is reported as interest revenue. MUTUAL FUNDS. State Street is the largest custodian of mutual funds in the United States, servicing 37% of registered funds, and provides services to offshore funds and in-country funds outside the United States. In 1993, over 40% of the increase in fiduciary compensation came from servicing the explosive growth in the mutual fund/collective investment fund industry worldwide. Mutual fund assets serviced increased 22% to $683 billion, reflecting growth in all types of funds except money market funds, as well as an increase in the number of funds serviced. The total number of funds serviced increased 18%, from 1,818 at year-end 1992 to 2,140 in 1993. New funds, primarily from existing customers, totaled 481, and were partially offset by transfers, mergers and consolidations, and liquidations. The number of trades processed for mutual fund portfolios increased 20%. State Street's capabilities and offshore locations also enabled it to benefit from increasingly complex global custody and accounting requirements. International assets of U.S.-registered mutual funds more than doubled, the number of mutual funds offering multiple classes of shares nearly doubled, offshore funds serviced increased 60% to 192 and assets of offshore funds increased 111% to $15.8 billion. MASTER TRUST/MASTER CUSTODY/GLOBAL CUSTODY. State Street provides custody, portfolio accounting, information and other related services for retirement and other financial assets of corporations, public funds, endowments, foundations and nuclear decommissioning trusts. In 1993, the growth in fiduciary compensation from these services worldwide came primarily from custody and portfolio accounting fees, particularly from global custody. State Street is ranked as the largest servicer of tax-exempt assets for corporations and public funds in the United States. In 1993, revenue growth came from major new public fund customers and growth of corporate pension funds currently serviced. Revenue grew rapidly from services facilitating the investment of short-term cash of public funds. Customers using financial asset services may elect to have State Street lend their securities to generate revenue to improve total return. In 1993, total securities on loan in this program increased substantially and the program was expanded to include securities denominated in 16 currencies, but revenue from securities lending declined due primarily to lower interest rate spreads. State Street attracted substantial new custody and portfolio accounting customers outside the United States. Current customers increased their assets, and revenue increased from their use of additional services, including securities lending, and performance measurement and analytics. These positive factors were slightly offset by the redemption of U.S.-issued mortgage-backed securities by Japanese investment trusts. FINANCIAL REVIEW State Street Boston Corporation INSTITUTIONAL ASSET MANAGEMENT. Revenue growth from the management of institutional assets improved as 1993 progressed, with growth across the product line and around the world. Total institutional assets managed increased to $136 billion, up $30 billion, or 28%, in 1993. In the United States, new customers and additional allocations to State Street Global Advisors by existing customers increased assets managed, utilizing both active and passive strategies. The continued strong performance of a domestic, active strategy, Matrix Equity, was an important factor in attracting new business. The significant turnaround in 1993 of the performance of non-U.S. equity markets attracted funds to State Street's international passive products. Money market products grew as well. Revenue from non-U.S. offices increased substantially, due in part to investors seeking to increase their investments in the United States. State Street Banque in Paris won an award for having the best-performing family of SICAVs (the equivalent of a mutual fund) in France, which attracted additional funds. CORPORATE TRUST. Corporate trust revenue was up substantially from a year ago, due primarily to new trusteeships from existing customers issuing asset-backed securities, a security in which State Street specializes; corporate securities; and municipal securities. Lower interest rates and the resulting large volume of mortgage refinancings resulted in substantial issuance of mortgage-backed debt. The municipal bond market was active with refinancings. Bonds under trusteeship increased to $201 billion, up from $136 billion at year-end 1992. This reflected $49 billion of bonds from a municipal trust and agency unit acquired in the second quarter and $35 billion in new trusteeships closed, partially offset by an exceptionally high volume of pre-payments, calls and paydowns. Included in assets under custody in the table below is $104 billion of corporate trust-related assets - the collateral of structured bond issues. It is anticipated that one customer will begin servicing its own collateral in the first half of 1994, lowering State Street's assets under custody by $47 billion. OTHER FIDUCIARY SERVICES. Personal trust revenue increased primarily due to new business. Revenue from servicing defined contribution plans, such as 401(k) plans, also grew, reflecting new business. The number of participant accounts serviced increased 17% to 816,000. Fiduciary compensation from servicing insurance company assets grew rapidly from new customers and an increase in existing customers' assets and activity. ASSETS UNDER CUSTODY, TRUSTEESHIP AND MANAGEMENT. Assets under custody, trusteeship and management serve to indicate the relative size of various types of customers and, in the context of market value changes, as proxies for business growth. There is not always a direct correlation between assets and revenue. This is due to the increasing number of services used by many of State Street's customers and the declining percentage of revenue coming from asset- based basic custody fees from some customers, combined with the broad range of basis-point fees charged depending upon the specific service provided.
ASSETS UNDER CUSTODY, TRUSTEESHIP AND MANAGEMENT Compound DECEMBER 31, Growth Change Rate (Dollars in billions) 1993 1992 1991 1990 1989 1988 92-93 88-93 Assets Under Custody: Mutual funds/collective investment funds $ 683.1 $ 560.3 $ 498.4 $429.3 $404.0 $346.0 22% 15% Customers in: North America: Master trust/master custody/global custody 574.1 465.9 335.2 250.3 242.0 161.8 23 29 Corporate trust 104.0 93.2 66.9 47.0 35.3 34.8 12 24 Insurance 60.4 46.8 37.9 23.1 21.3 19.1 29 26 Other 83.7 83.9 71.3 66.0 61.1 45.4 -- 13 Europe 20.0 13.2 13.2 9.5 11.2 9.4 52 16 Asia/Pacific 46.1 30.7 31.9 16.1 12.1 8.6 50 40 Total assets under custody $1,571.4 $1,294.0 $1,054.8 $841.3 $787.0 $625.1 21 20 Bonds Under Trusteeship: Corporate trust $ 201.0 $ 136.0 $ 132.0 $108.4 $ 60.7 $ 52.2 48 31 Assets Under Management: Institutional: Equities and bonds $ 64.9 $ 50.3 $ 44.4 $ 34.4 $ 31.9 $ 24.7 29 21 Money market 51.7 37.1 21.9 14.0 10.8 7.0 39 49 Employer securities 19.7 18.8 17.8 13.8 10.6 3.7 5 40 Personal 5.8 5.2 4.8 3.4 3.5 3.0 12 14 Total assets under management $ 142.1 $ 111.4 $ 88.9 $ 65.6 $ 56.8 $ 38.4 28 30
FINANCIAL REVIEW State Street Boston Corporation Equity market values improved worldwide in 1993. From year-end 1992 to year-end 1993, the U.S. equity market, as measured by the S&P 500 index, increased 7%, compared with an increase of 4% in the previous year. International equity markets, as measured in dollars by the EAFE index,increased 30%, which compares with a 14% decline in 1992. As measured by theLehman Brothers Government/ Corporate Bond index, total return in the U.S. bond market was 11% and values increased 4%. U.S. equity markets were substantially more active in 1993 than in 1992. In 1993, total assets under custody increased 21% to $1.6 trillion, although U.S. market values grew moderately. At year-end, approximately 40% of assets under custody were fixed income instruments, 30% were equities and 30% were short-term instruments. Non-U.S. securities comprised 11% of total assets under custody, up from 7% in 1992. Total bonds under trusteeship increased $65 billion, of which $49 billion was due to an acquisition. Total assets under management increased 28% to $142.1 billion, due to growth in all types of assets. OTHER FEE REVENUE. In 1993, foreign exchange trading revenue was $82.7 million, up 43% from $57.9 million in 1992. The number of foreign exchange trades grew rapidly due to more cross-border investing and associated currency risk management transactions by customers. Additional currencies were traded as active investors entered emerging markets. New customers were added at an accelerated pace, most of which were customers who use State Street for other financial asset services, and their investment managers. The increase in revenue also reflected volatility in currency markets throughout 1993. Processing service fees were $46.1 million, up $15.7 million, or 52%. The increase was due primarily to the full-year impact of the October 1, 1992 acquisition of Wendover Funding, Inc., a mortgage subservicer. Service fees were $40.0 million, up $8.7 million, or 28%, from 1992. The increase was due to securities brokerage volume and additional fees from investment banking, international trade finance services, cash management and bank service fees. Corporate banking customers chose to pay more in fees rather than in compensating demand deposit balances, due in part to lower interest rates. Securities gains were $15.4 million, compared with $12.3 million in 1992, as State Street actively managed the available-for-sale portfolio for total return. The $3.6 million decrease in other fee revenue was due to additional writedowns of investments in tax-advantaged financings, which lowered fee revenue but had more than offsetting tax benefits; to currency translation losses on the foreign bond investment portfolio; and to less revenue from the disposition of leasing residuals. These reductions were partially offset by increased trading account profits and additional earnings from Boston Financial Data Services, an affiliate engaged in mutual fund shareholder accounting. NET INTEREST REVENUE Net interest revenue is the difference between interest revenue earned on money market assets, investment securities and loans and the interest paid on interest-bearing deposits, money market liabilities and other borrowed funds. State Street manages its balance sheet to support the growth of its financial asset services business. As a result, net interest revenue growth is being driven by increasing amounts of customer funds on the balance sheet. NET INTEREST REVENUE - TAXABLE EQUIVALENT
Compound Growth Change Rate (Dollars in millions) 1993 1992 1991 1990 1989 1988 92-93 88-93 Interest revenue $698.9 $714.3 $737.7 $817.5 $648.3 $499.3 Taxable equivalent adjustment 20.3 13.7 18.8 20.8 15.5 16.1 719.2 728.0 756.5 838.3 663.8 515.4 Interest expense 381.3 432.1 464.2 546.7 431.3 299.7 Net interest revenue $337.9 $295.9 $292.3 $291.6 $232.5 $215.7 14% 9%
FINANCIAL REVIEW State Street Boston Corporation In this analysis, net interest revenue is expressed on a fully taxable equivalent basis to adjust for the tax-exempt status of revenue earned on certain investment securities and loans. Taxable equivalent net interest revenue in 1993 was $337.9 million, up $42.0 million, or 14%, over 1992. The improvement in net interest revenue was primarily due to growth in funding. State Street accommodated the transaction and short-term investment needs of its financial asset services customers in the form of noninterest-bearing deposits, repurchase agreements and foreign deposits. This helped to fund a 17% increase in interest-earning assets. Also contributing to the increase in net interest revenue was a wider spread between interest rates earned and paid, which increased from 141 basis points, or 1.41%, in 1992 to 150 basis points in 1993, an increase of 9 basis points. See the balance sheet review on page 29. These two positive factors were partially offset by the effect of the level of market interest rates. Market interest rates continued to decline in 1993, and the Treasury yield curve flattened significantly. Overnight rates decreased by approximately 50 basis points, and the two-year Treasury rate fell 72 basis points. The prime rate also fell by 25 basis points. State Street's net interest revenue is sensitive to the level of market interest rates, particularly U.S. interest rates, due to its large volume of noninterest-bearing deposits. Generally, low interest rates result in lower net interest revenue caused by the investment of noninterest-bearing sources of funds at lower rates, all other variables being the same. Net interest revenue tends to be higher when interest rates are high. However, because State Street is liability sensitive, a temporary negative impact is anticipated if short-term interest rates were to rise. See the interest rate sensitivity management discussion on page 31. NET INTEREST MARGIN. Net interest margin is defined as taxable equivalent net interest revenue expressed as a percentage of average interest-earning assets. The margin declined 6 basis points to 2.08% in 1993 from 2.14% in 1992. The contribution to the margin from noninterest-bearing sources was 15 basis points below 1992 as a result of investment of these funds at lower rates. Further declining market interest rates outweighed the benefits of asset growth and a wider spread between interest rates earned and paid.
NET INTEREST MARGIN 1993 1992 1991 1990 1989 1988 Yield on interest-earning assets 4.43% 5.26% 7.47% 9.37% 9.55% 8.39% Rate on interest-bearing liabilities 2.93 3.85 5.87 7.91 8.73 7.10 Excess of rate earned over rate paid 1.50 1.41 1.60 1.46 0.82 1.29 Contribution of noninterest-bearing sources 0.58 0.73 1.29 1.80 2.52 2.22 Net interest margin 2.08% 2.14% 2.89% 3.26% 3.34% 3.51%
PROVISION FOR LOAN LOSSES. The provision for loan losses is the amount charged to income during the current period to maintain the allowance for loan losses at a level which management considers appropriate, relative to the level of risk in the loan portfolio and other extensions of credit. The provision for loan losses was $11.3 million in 1993, which compares with $12.2 million in 1992. Net charge-offs were $16.3 million in 1993, compared with $20.1 million in 1992. Additional discussion of the allowance for loan losses, asset quality, and loan charge-offs and recoveries is presented in the credit risk section on page 34. OPERATING EXPENSES In 1993, operating expenses were $862.3 million, up $145.9 million, or 20%, due to growth, strategic investment spending and acquisitions. Excluding acquisitions, operating expenses were up 17%. The expense increase was primarily in salaries and employee benefits, equipment, and subcustodian fees. Most of the increase was required to support the rapid growth of the business. In addition, in 1993 State Street increased its level of investment spending to strengthen market leadership and to position it for future growth. Strategic investment spending equaled 10% of total revenue and is expected to remain at this level through 1994. Investment spending was for information technology, core processing infrastructure, and product and market development. Systems development is the largest category of investment spending. In 1993, one of the strategic initiatives receiving substantial investment spending was Global Horizon Interchange, an architecture that provides and integrates data at the point of use. State Street believes Global Horizon Interchange will position it to be a leader in information delivery. Applications were also developed to support the reengineering of core cash and securities processing workflows, resulting in improved quality and lower unit costs. Major investments were made in core processing infrastructure in 1993 - going from three major processing computers to five, and from one data center to two. Most of this was needed to support current growth, but a portion was designed to improve 24-hour, on-line reliability and to provide more processing back-up. State Street invested in geographic and product expansion, increasing the number of services offered in non-U.S. offices and developing products in the United States. FINANCIAL REVIEW State Street Boston Corporation
OPERATING EXPENSES Compound Growth Change Rate (Dollars in millions) 1993 1992 1991 1990 1989 1988 92-93 88-93 Salaries and employee benefits $479.2 $409.9 $336.8 $300.0 $264.8 $245.1 17% 14% Occupancy, net 60.6 53.3 45.7 41.7 38.8 35.6 14 11 Equipment 100.3 67.0 48.4 45.3 40.8 38.6 50 21 Contract services 64.1 45.4 47.3 40.7 32.6 23.1 41 23 Professional services 35.4 30.1 24.7 19.2 14.0 11.8 17 25 Telecommunications 21.3 18.1 14.7 13.6 13.0 12.7 18 11 Advertising and sales promotion 18.7 15.1 11.1 10.6 9.7 9.1 24 15 Postage, forms and supplies 17.9 16.8 16.5 16.3 16.4 13.4 7 6 FDIC and other insurance 17.3 16.9 12.4 7.4 7.8 7.5 2 18 Operating and processing losses 4.7 7.0 17.7 15.0 17.4 19.8 (33) (25) Other 42.8 36.8 33.2 34.8 22.7 20.3 16 16 Total operating expenses $862.3 $716.4 $608.5 $544.6 $478.0 $437.0 20 15
Salaries and employee benefits, the largest component of expense, were $479.2 million, up $69.3 million, or 17%, from 1992, due to an 11% increase in full- time equivalent staff, higher salaries and rate increases in various benefits. The first year of recording costs associated with providing postretirement health care benefits to employees also contributed to the increase in benefit costs. Occupancy expense increased $7.3 million, or 14%, due to a second data center, the expenses of acquired businesses, additional space and expansion of non-U.S. offices. Equipment expense of $100.3 million was up 50%, or $33.3 million, due to additional computers and related information technology equipment needed to support business growth and a broader product line. The increase included the expense associated with equipping the second data center with two large computers. Contract services expense includes the cost of subcustodian services in over 60 countries used in delivering global custody services, as well as other outside services including pricing and processing services. In 1993, contract services expense increased $18.7 million, or 41%, primarily due to subcustodian services supporting additional cross-border investing. Also contributing to the growth were increased transaction volumes and the full-year impact of an acquisition. Professional services expense was $35.4 million, up 17%, or $5.3 million, due to the development and enhancement of new application systems and products. Telecommunications expense was $21.3 million, up 18%, due to the full year of expenses of an acquisition and a second data center, as well as growth. Advertising and sales promotion was $18.7 million, up 24%, due to increased expenses related to additional defined contribution plan business, product development for defined contribution plans and an expanded sales effort. State Street incurs costs from errors in securities processing and settlement, valuations, corporate actions and the usual banking losses. In 1993, the $2.3 million decrease in operating and processing losses was due to further reduction in securities processing losses. The $6.0 million increase in ``other'' expense is due to increased costs associated with operations outside the United States, a non-recurring credit in 1992, and increased charitable contributions. These were partially offset by lower expenses associated with other real estate owned and lower depository costs. INCOME TAXES Income tax expense charged to earnings was $97.6 million in 1993 and $96.1 million in 1992. The respective effective tax rates were 35.2% and 37.5%. The negative effect of the 1993 increase in the U.S. corporate income tax rate was more than offset by a higher level of tax credits from tax-advantaged financings and more tax-exempt revenue. The increase in the U.S. corporate income tax rate for 1993 lowered reported earnings per share for the year by $.03. State Street adopted a new accounting standard for income taxes in 1993. The impact of the adoption was not material. COMPARISON OF 1992 VERSUS 1991 In 1992, fully diluted earnings per share were $2.07, up 14% from $1.81 in 1991. The 1991 results were affected by a $56.2 million gain on the sale of the credit card loan portfolio, which increased earnings per share by $.43, and a cyclically high provision for loan losses due to the recession. FINANCIAL REVIEW State Street Boston Corporation In 1992, total revenue was $986.6 million, up 16%, or $134.2 million, from 1991. Fee revenue increased $139.0 million, or 25%, to $702.9 million. This increase resulted primarily from continued growth in fiduciary compensation, up $102.9 million, or 23%. More than half of the year-over-year increase in fiduciary compensation came from the mutual fund and master trust/master custody services. Total assets under custody were $1.3 trillion, up 23%. Total assets under management were $111.4 million, up 25%. In 1992, net charge-offs declined $25.0 million, or 55%, and the outlook for credit quality improved, resulting in a $47.8 million reduction in the provision for loan losses. In 1992, operating expenses were $716.4 million, up $107.9 million, or 18%, due to growth and development expense. Salaries and employee benefits, the largest category of expense, were $409.9 million, up 22%, due primarily to an increase in full-time staff and merit increases. LINES OF BUSINESS The estimated results for State Street's two lines of business are derived from internal accounting systems, which are continually refined to reflect organizational performance. These systems allocate to each business revenue and expenses related to the business, as well as certain corporate overhead, operations and systems development expenses. They also incorporate processes for allocating assets and liabilities to each business, including the interest rates appropriate to each allocation. Capital is allocated using the Federal regulatory guidelines as a basis, coupled with management's judgment regarding the operational risks inherent in the businesses. The capital allocations may not be representative of the capital levels that would be required if these two lines of business were independent business units. This section of financial review presents the performance results of State Street's two lines of business: financial asset services and commercial lending. The following line-of-business information is based on management accounting practices that conform to and support the strategic objectives and management structure of State Street and are not necessarily comparable with similar information for any other banking company:
LINES OF BUSINESS Financial Commercial (Taxable equivalent basis, Asset Services Lending Corporate dollars in millions) 1993 1992 1991 1993 1992 1991 1993 1992 1991 Fee revenue $ 803.6 $ 670.7 $531.5 $ 36.5 $ 34.8 $32.4 $ (6.7) $ (2.6) $ (.1) Gain on sale of credit card portfolio 56.2 Net interest revenue 260.1 224.4 204.6 86.1 78.0 90.1 (8.3) (6.4) (2.3) Provision for loan losses .5 (.2) 10.8 12.2 60.2 Total revenue 1,063.2 895.1 736.3 111.8 100.6 62.3 (15.0) (9.0) 53.8 Operating expenses 769.0 630.7 517.1 64.5 63.6 69.5 28.8 22.1 21.9 Income before income taxes 294.2 264.4 219.2 47.3 37.0 (7.2) (43.8) (31.1) 31.9 Income taxes 129.0 113.6 95.2 20.1 15.7 (3.0) (31.2) (19.5) 12.4 Net Income $ 165.2 $ 150.8 $124.0 $ 27.2 $ 21.3 $(4.2) $(12.6) $(11.6) $19.5 Percentage contribution 92% 94% 89% 15% 13% (3)% (7)% (7)% 14% Average assets $15,918 $13,525 $9,476 $2,251 $1,977 $2,098
FINANCIAL ASSET SERVICES. Financial asset services, which contributed 92% of State Street's net income in 1993, is comprised of the business components that service and manage financial assets worldwide. These include services for mutual funds and pension plans, both defined benefit and defined contribution; corporate trusteeship; and management of institutional financial assets and personal trust. A broad array of banking services is provided, including accounting, custody of securities, information services and recordkeeping; taking short-term customer funds onto State Street's balance sheet; investment management; foreign exchange trading; and cash management. Revenue for these services is reflected in fee revenue and net interest revenue. In 1993, net income of $165.2 million increased $14.4 million, or 10%, from 1992. Total revenue growth of $168.1 million, or 19%, was offset by a $138.3 million, or 22%, increase in operating expenses. The $168.1 million increase in total revenue was driven by a $132.9 million, or 20%, increase in fee revenue. This was primarily due to an $82.4 million, or 15%, increase in fiduciary compensation from accounting, custody of securities, information services, recordkeeping, trusteeships and investment management. Growth occurred across all product lines, with services for mutual funds contributing substantially to the year-over-year increase. Additional cross- border investing by customers contributed to a substantial increase in foreign exchange trading revenue. Growth in taxable equivalent net interest revenue of $35.7 million, or 16%, reflected an increase in short-term customer funds on the balance sheet, particularly noninterest-bearing demand deposits, interest-bearing foreign deposits and repurchase agreements. As interest rates declined, financial asset services benefitted from a wider spread between interest rates earned and paid, which was offset by the negative effect of a lower yield on interest-earning assets. FINANCIAL REVIEW State Street Boston Corporation Operating expenses were $769.0 million and grew 22% over 1992, primarily in support of growth. In 1993, expenses also reflected an increase in strategic investments and the operating expenses resulting from acquisitions. Nearly all categories of expenses increased, with salaries and employee benefits, equipment, and subcustodian fees contributing substantially to the year-over- year increase. COMMERCIAL LENDING. In 1993, commercial lending contributed 15% of net income. Net income increased $5.9 million, or 28%, due to higher net interest revenue and a $1.4 million lower provision for loan losses. Loan growth and wider loan spreads increased taxable equivalent net interest revenue $8.1 million, or 10%. Commercial and financial loans increased, due in part to additional secured overnight loans to securities brokers. Foreign loans grew from the expansion of trade finance, and lease financing loans increased. CORPORATE. Corporate includes the impact of long-term debt; investment of corporate cash; tax credits from tax-advantaged financings, including writedowns of these investments in fee revenue; a gain on the sale of the credit card portfolio in 1991; operating expenses; and other corporate items. In 1993, these corporate items reduced net income by 7%. COMPARISON OF 1992 VERSUS 1991. In 1992, net income from financial asset services increased $26.8 million, or 22%, due to a $158.8 million increase in revenue, partially offset by a $113.6 increase in expenses. Revenue growth was driven by a $139.2 million increase in fee revenue. Net income from commercial lending was $21.3 million in 1992, up from a loss of $4.2 million in 1991 due to a $60.2 million provision for loan losses in 1991. In 1992, corporate net income declined $31.1 million due to the sale of the credit card loan portfolio in 1991, which contributed $32.6 million to net income. BALANCE SHEET REVIEW State Street manages its balance sheet to support the needs of the financial asset services business. In 1993, deposits and liabilities increased from additional customers' funds, and short-term loans increased. While the balance sheet was expanded to meet customer needs, State Street continued to place high priority on maintaining its high credit and deposit ratings. The Corporation's unusual business mix results in a balance sheet with low credit risk. The business mix also affects State Street's approach to managing interest rate sensitivity, liquidity and risk. LIABILITIES State Street's balance sheet is liability driven. Growth in interest-earning assets is determined by growth in interest-bearing liabilities, stockholders' equity and other noninterest-bearing sources. State Street accommodates customers' transaction processing needs, which increases demand deposits, and their short-term investment needs through foreign deposits and repurchase agreements.
SOURCES OF FUNDS Average Volume Average Rate (Dollars in millions) 1993 1992 1991 1993 1992 1991 Interest-bearing deposits: Savings $ 2,167 $ 2,154 $ 1,819 2.41% 3.16% 5.22% Time 157 162 307 2.88 3.86 6.00 Foreign 4,954 3,955 2,648 2.95 4.42 6.55 Total interest-bearing deposits 7,278 6,271 4,774 2.79 3.97 6.01 Federal funds purchased 741 919 837 2.84 3.35 5.48 Securities sold under repurchase agreements 4,134 3,290 1,766 2.89 3.42 5.08 Other short-term borrowings 216 194 156 3.78 4.27 5.29 Notes payable 511 389 234 3.90 4.74 8.69 Long-term debt 122 146 146 8.19 9.10 9.04 Total interest-bearing liabilities 13,002 11,209 7,913 2.93 3.85 5.87 Other noninterest-bearing sources 2,187 1,758 1,445 Stockholders' equity 1,033 887 773 Total sources $16,222 $13,854 $10,131
Interest-bearing liabilities increased $1.8 billion, or 16%, in 1993. Most of the growth was in interest-bearing deposits, which increased $1.0 billion, or 16%, over 1992. This increase was due to a higher balance of foreign deposits, up $1.0 billion, or 25%, reflecting additional deposits from investment managers of global portfolios. Savings deposits, primarily insured money market accounts held by corporate customers, remained stable, even in the declining interest rate environment. Securities sold under repurchase agreements increased $844 million, or 26%, due to additional demand by customers, particularly mutual fund managers. FINANCIAL REVIEW State Street Boston Corporation Notes payable increased $122 million. Bank notes were issued during the year under a program through which State Street Bank may issue up to $750 million of uninsured notes having maturities of 14 days to five years. In September, State Street issued $100 million of 5.95% senior notes with a 10-year maturity. These notes were rated A1 by Moody's and AA- by Standard & Poor's. Proceeds from this issuance were used in part to retire $75 million of 8.50% senior notes. As a result of this and another refinancing, the average rate on long-term debt declined 91 basis points from 1992. Growth in noninterest-bearing sources of funds contributed importantly to net interest revenue in 1993. Non-interest-bearing deposits increased $671 million, or 23%. The increase was due in part to two acquisitions, a mortgage subservicer and a municipal trust and agency unit, and to activity of mutual fund customers. Stockholders' equity increased $146 million, or 16%, over 1992. ASSETS These additional funds and deposits enabled State Street to increase interest- earning assets. In 1993, average interest-earning assets increased $2.4 billion, or 17%. Growth was mainly in investment securities, securities purchased under resale agreements and loans. Money market assets and investment securities constitute the major elements of State Street's assets. These assets, in comparison to loans, have less credit risk and are more marketable.
INTEREST-EARNING ASSETS Average Volume Average Rate (Dollars in millions) 1993 1992 1991 1993 1992 1991 Interest-bearing deposits with banks $ 5,022 $ 5,102 $ 3,646 4.01% 5.05% 7.19% Securities purchased under resale agreements 3,255 2,603 913 3.14 3.75 5.63 Federal funds sold 413 330 305 3.06 3.51 5.83 Trading account assets 369 226 152 4.21 4.45 7.80 Investment securities: U.S. Treasury and Federal agencies 2,077 1,703 1,417 5.75 6.80 8.16 State and political subdivisions 683 376 378 5.54 7.72 9.09 Other investments 1,827 1,444 1,212 5.33 6.09 8.32 Total investment securities 4,587 3,523 3,007 5.55 6.60 8.34 Loans: Commercial and financial 1,865 1,556 1,583 4.81 5.64 7.88 Real estate 97 114 144 6.97 7.11 8.47 Consumer 53 66 90 6.81 7.65 10.39 Foreign 282 117 87 5.82 6.08 7.43 Lease financing 279 217 204 5.61 4.84 4.84 Total loans 2,576 2,070 2,108 5.14 5.72 7.72 Total interest-earning assets $16,222 $13,854 $10,131 4.43 5.26 7.47
Interest-bearing deposits with banks are short-term instruments, primarily Eurocurrency placements, invested with foreign banks in Western Europe and the Asia/Pacific region. As of December 31, 1993, the average maturity of the Eurocurrency placements was 49 days. In 1993, securities purchased under resale agreements increased $652 million as a result of satisfying customer demand for securities sold under repurchase agreement. These assets are fully collateralized by U.S. Treasury and Federal agency securities, and at year-end had an average maturity of 22 days. The investment securities portfolio continued to expand during 1993 to $4.6 billion, or 25% of assets. State Street classifies its investment securities into two categories, held-for-investment and available-for-sale. The held-for- investment portfolio is used to invest depositors' funds, provide asset diversity and stabilize revenue. The available-for-sale portfolio is managed for total return. The held-for-investment portfolio, which is carried at cost, is composed of investment-quality, asset-backed securities, U.S. Treasury and Federal agency securities, and bonds and notes of state and political subdivisions. Based upon the expected principal payments, as of December 31, 1993, the weighted average life of the asset-backed securities portfolio was 1.3 years. Securities in this portfolio are highly rated; 96% were AAA as of December 31, 1993. U.S. Treasury and Federal agency securities had a weighted average life of 1.5 years. Bonds of state and political subdivisions were also of high quality, with a rating of A or better on 87% of the portfolio. The majority of the rest of the portfolio consisted of small, unrated issues of communities with ratings of A or better on their rated issues. The total portfolio of held-for-investment securities had net unrealized appreciation of $23.1 million at December 31, 1993. The available-for-sale portfolio is composed of securities acquired with the intent to hold for an indefinite period of time, not necessarily until final maturity. At December 31, 1993, this portfolio had a balance of $1.2 billion and was comprised of U.S. Treasury and foreign government bonds. Available-for-sale securities are carried at the lower of cost or market. At December 31, 1993, the market value of these securities was $4.8 million higher than cost. FINANCIAL REVIEW State Street Boston Corporation At year-end 1993, loans comprised 14% of State Street's assets, compared with over 55% for other banking companies of comparable size. One-third of the loan portfolio supports the short-term needs of financial asset services customers and securities brokers in conjunction with their trading and settlement activity. These are generally short-term, usually overnight, and are structured to have relatively low credit exposure. In 1993, loans increased by $506 million, or 24%, with most of the growth in relatively low-risk loans to customers of the financial asset services business and to securities brokers. Foreign loans increased $165 million due to expanding trade finance activities, including a second-quarter acquisition of an Australian merchant bank, which added $68 million in loans, and an increase in transaction loans associated with cross-border investing. Lease financing increased $62 million. INTEREST RATE SENSITIVITY MANAGEMENT The objective of interest rate sensitivity management is to provide sustainable and stable 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 to meet revenue goals by adjusting the mix, yields and maturity or repricing characteristics based on changing market conditions. Interest-rate risk arises from differences in the timing of repricing assets and liabilities. Depending on the degree of difference, changes in interest rates and yield curves can result in an increase or decrease in net interest revenue and affect the valuation of assets and liabilities. Under policy guidelines approved by the Board of Directors, State Street seeks to limit interest-rate risk while using timing differences to manage net interest revenue. One measure of interest-rate risk, as shown below, is the difference in asset and liability repricing on a cumulative basis within a specified time frame. State Street monitors the three-month, six-month and one-year cumulative net interest-earning assets, or gaps.
INTEREST SENSITIVITY POSITION AT DECEMBER 31, 1993 Interest Sensitivity Period in Months (Dollars in millions) Balance 0-3 4-6 7-12 over 12 Interest-Earning Assets: Interest-bearing deposits with banks $ 5,148 $ 4,113 $ 999 $ 36 $ Other money market assets (1) 1,624 1,618 6 Investment securities: Held for investment 4,484 1,070 629 987 1,798 Available for sale 1,217 1,217 Loans 2,202 1,597 42 50 513 Total interest-earning assets 14,675 9,615 1,670 1,073 2,317 Interest-Bearing Liabilities: Domestic deposits 2,141 1,969 9 12 151 Foreign deposits (2) 5,427 5,276 150 1 Federal funds purchased and repurchase agreements 3,242 3,236 6 Other interest-bearing liabilities (2) 748 394 150 204 Total interest-bearing liabilities 11,558 10,875 315 13 355 Interest rate sensitivity position (1,260) 1,355 1,060 1,962 Cumulative interest rate sensitivity position (1,260) 95 1,155 3,117 Cumulative gap percentage (3) (9)% 1% 8% 21% - ------------ (1) Includes adjustment to normalize the one-day position. (2) Includes financial futures and interest-rate swaps. (3) Cumulative interest rate sensitivity position as a percent of earning assets.
The table shows State Street's year-end interest rate sensitivity position, measured by the earlier of repricing date or maturity, for various assets and liabilities. Non-maturity items, such as asset-backed securities and deposits, are reported in time periods based on management's evaluations of prepayments and repricing. Available-for-sale investment securities are reported in 0-3 months. The analysis indicates that the Corporation was liability sensitive in the short term - that interest-bearing liabilities are repricing faster than interest-earning assets - and that net interest revenue would improve when interest rates are falling and decrease when interest rates are rising. The level of rates is also an important determinant of net interest revenue. F I N A N C I A L R E V I E W State Street Boston Corporation State Street uses simulation models in managing interest-rate risk. The Corporation also uses duration and market valuation analyses to estimate and manage the changes in the value of equity due to changes in interest rates. These models and analyses indicate that the Corporation has low exposure to changes in interest rates. State Street maintains flexibility in its balance sheet to adjust interest sensitivity. Since interest-bearing sources of funds are predominantly short-term, State Street maintains a generally short-term structure for interest-earning assets, including money market assets, investments and loans. Off-balance sheet financial instruments are used as part of overall asset and liability management. Financial futures and interest-rate swaps were used modestly during the year to maintain the Corporation's interest-rate exposure within policy limits. At December 31, 1993, $150 million of financial futures and $75 million of interest-rate swaps reduced short-term liability sensitivity. LIQUIDITY The primary objective of State Street's liquidity management is to ensure that the Corporation has sufficient funds to replace maturing liabilities, accommodate the transaction and cash management requirements of its customers, meet loan commitments and accommodate other corporate needs. Liquidity is provided from the ability to access global market sources of funding and gather additional deposits, and from maturing short-term assets, sale of available-for-sale securities and payment of loans. State Street manages its assets and liabilities to maintain a high level of liquidity. The Corporation has an extensive and diverse funding base inside and outside the United States. A significant percentage of funding comes from customers who have other relationships with State Street, particularly those using financial asset services world-wide. Deposits are accessed through domestic as well as international treasury centers, providing a cost-effective geographically diverse source of funding. Significant funding is also provided from institutional customers' demand for repurchase agreements for their short-term investment needs. State Street maintains other funding alternatives, ensuring access to additional sources of funds if needed. Relationships are maintained with a variety of investors for a range of financial instruments, in various markets and time zones. State Street maintains a large portfolio of liquid assets. At December 31, 1993, the portfolio included $5.1 billion of interest-bearing deposits with banks and $2.3 billion of securities purchased under resale agreements. Of the total $7.4 billion, $2.2 billion matures within one week, and nearly all matures within six months. Although not relied on for daily liquidity needs, the $1.2 billion available-for-sale portfolio of marketable securities provides a significant secondary source of liquidity. State Street maintains strong liquidity ratios. When liquidity is measured by the ratio of liquid assets to total assets, State Street ranks among the highest of U.S. banking companies. Liquid assets consist of cash and due from banks, interest-bearing deposits with banks, Federal funds sold, securities purchased under resale agreements trading account assets and investment securities. At December 31, 1993, the Corporation's liquid assets were 80% of total assets. State Street's high ratings as a corporation and depository enhance its liquidity. The Corporation's senior debt is rated AA- by Standard & Poor's, A1 by Moody's Investor Services and AA by IBCA, Inc. Depending upon the rating service, five or fewer of the largest 100 bank holding companies in the United States have higher ratings. State Street Bank's long-term certificate of deposit ratings are AA by Standard & Poor's, Aa2 by Moody's Investor Services and AA+ by IBCA, Inc. These ratings, as well as strong capital ratios, enhance State Street's liquidity by making its liabilities attractive to a large number of investors worldwide. In August, 1993, a shelf registration became effective that allows the Corporation to issue up to $250 million of debt securities with maturities not to exceed 10 years. Proceeds from the first tranche of $100 million were used to redeem existing debt and will be used for general corporate purposes. In 1994, State Street plans to begin issuing up to $200 million of commercial paper. This will be a source of additional funding for the Corporation and State Street Bank. The Consolidated Statements of Cash Flows on page 38 provide additional information. FAIR VALUE OF FINANCIAL INSTRUMENTS The short maturity structure of State Street's assets and liabilities results in the fair value of its financial instruments equating to or closely approximating book value, with the exception of investment securities, which had appreciation of $28 million as of December 31, 1993. See Note S, page 50, for a further discussion. FINANCIAL REVIEW State Street Boston Corporation CAPITAL State Street maintains strong capital levels to support current operations and continued growth. State Street continues to generate capital internally at a high rate. In 1993, and in each of the preceding six years, capital was generated internally through the retention of earnings at a rate of 14% or higher. On December 31, 1988, stockholders' equity was $506 million. By December 31, 1993, it had increased to $1.1 billion, a 14% annual growth rate. In 1993, stockholders' equity increased $152 million, $140 million from retention of earnings and $12 million related to exercise of stock options and the conversions of debentures. The Federal Reserve Board, State Street's principal regulator, has established risk-based capital guidelines that require minimum ratios of capital to risk-weighted assets and certain off-balance sheet exposures. The Board also maintains a leverage ratio that is a measure of capital to total average balance sheet assets. The following table shows State Street's regulatory capital ratios as they compare to the minimum guidelines: REGULATORY CAPITAL Minimum December 31, Regulatory (Dollars in millions) 1993 1992 Guidelines Risk-based ratios: Tier 1 capital 12.1% 13.2% 4% Total capital 12.7 14.6 8 Leverage ratio 5.3 5.9 3 Tier 1 capital $1,070 $ 938 Total capital 1,122 1,043 Risk-adjusted assets 8,842 7,131 State Street has developed internal capital adequacy policies that focus on risk exposure rather than on asset levels. These policies place primary importance on the risk-based guidelines, particularly the Tier 1 risk-based capital ratio. This emphasis is appropriate to State Street's unusual balance sheet, which has a high degree of liquidity and low credit risk exposure. At year-end 1993, State Street's Tier 1 capital ratio of 12.1% significantly exceeded the regulatory guidelines and was among the strongest for large U.S. banking companies. The significant increase in balance sheet assets during 1993 caused State Street's leverage ratio to decline to 5.3% from 5.9% in 1992. Because most balance sheet growth was in low-risk assets, which are assigned risk weights of 0% and 20%, the impact of this growth to the risk-based ratios was less. Moderate growth in off-balance sheet activity, which is included in the risk- based calculations, contributed to the decline in the risk-based ratios. During 1992, bank regulators adopted five capital categories that are based on capital ratios and other factors and are applicable to banks for certain regulatory supervisory purposes. These categories range from ``well capitalized'' to ``critically undercapitalized.'' The ``well capitalized'' category requires that a bank maintain a minimum Tier 1 risk-based ratio of 6%, a minimum total risk-based capital ratio of 10% and a minimum leverage ratio of 5%. State Street manages and monitors its capital ratios to assure that they exceed the minimum standards for ``well capitalized.'' At December 31, 1993, State Street Bank had a Tier 1 risk-based capital ratio of 11.8%, a total risk-based capital ratio of 12.2% and a leverage ratio of 5.1%. DIVIDENDS AND COMMON STOCK State Street increased the quarterly dividend to stockholders twice during 1993, continuing the pattern of dividend increases that began in 1978. At year-end 1993, the dividend rate was 17% higher than at year-end 1992. Since 1988, dividends per share have increased at an annual rate of 15%. State Street's policy is to increase dividends at a rate that is consistent with long-term earnings growth and that will permit levels of internal capital generation sufficient to allow for the full development of strategic business opportunities. The dividend payout ratio was 22% for 1993. FINANCIAL REVIEW State Street Boston Corporation There were 5,926 stockholders of record at year-end 1993. The following table shows the quarterly dividends and market value per share for 1992 and 1993: DIVIDENDS AND COMMON STOCK
MARKET PRICE Market Price DIVIDENDS END OF Dividends End of DECLARED LOW HIGH PERIOD Declared Low High Period 1993 1992 First $.120 $41 $49 1/8 $44 1/2 First $.105 $29 1/4 $33 1/8 $32 1/8 Second .130 29 1/4 45 3/4 33 1/8 Second .110 30 1/4 38 3/4 35 3/4 Third .130 31 3/4 35 3/4 35 5/8 Third .110 33 5/8 39 36 7/8 Fourth .140 35 3/8 39 3/4 37 1/2 Fourth .120 35 3/8 44 7/8 43 3/4
RISK MANAGEMENT In providing financial asset services globally, there are certain inherent risks which must be managed and controlled. These include counterparty credit risk, operations and settlement risk, and market risk. Risk management is an integral part of the Corporation's business activities. The credit and risk management function is centrally organized with close ties to the business units in order to identify and manage risks effectively. This structure allows for corporate risk management across the business areas while individual line areas remain responsible for risk management in their units. Continuing a trend of recent years, risk management resources are increasingly devoted to financial asset services. Emphasis in risk management is placed on experienced staff and on establishing specific authorization levels and limits. Counterparties are subject to a rigorous credit approval process which covers the traditional lending services and global financial asset services for foreign exchange, credit facilities, placements, credit enhancement services, securities lending and securities clearing facilities. Concentration is managed in terms of business risk concentration, including specific industry lending concentrations and country limits, as well as limits on individual counterparties. Operating risk management cuts across most of the securities-related business areas of the Corporation and focuses on payment system risk management, overdraft monitoring and control, and global securities clearing and settlement. In addition to specific authorization levels and limits, operating risk is also controlled through extensive automation, operating procedures and insurance. Market risk arises from price changes in various markets. Market risk from foreign exchange and trading activities is monitored and controlled through established limits on positions and aggregate limits based on estimates of potential loss of earnings under assumptions about changes in market conditions. CREDIT 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 carefully all aspects of credit risk. These include a comprehensive credit review and approval process which involves the assignment of risk ratings to all loans and off-balance sheet credit exposures. The allowance for loan losses is available to cover potential losses from current credit exposure in the loan portfolio and certain off-balance sheet commitments. At December 31, 1993, total non-performing assets were $37.9 million, a $14.9 million decrease from year-end 1992. Non-performing assets include $26.8 million of non-accrual loans, which was 1% of total volume, and $11.1 million of other real estate owned. It is State Street's policy to place a loan on non-accrual when either principal or interest becomes 60 days past due. In 1993, loans placed on non-accrual status were more than offset by charge-offs, payments, and the return to accrual status of several loans. Loans are returned to accrual status only when interest and principal payments are brought current and future payments are assured. The decline in other real estate owned resulted from property sales. At December 31, 1993, non-accrual loans were being carried at 41% of their original value. Fully diluted earnings per share would have been $.xx higher had non-accrual loans performed according to their original terms. In 1993, net charge-offs declined to $16.4 from $20.1 million in 1992. Net charge-offs as a percentage of average loans were .63% as compared to .97% for 1992. The allowance for loan losses is increased by the provision for loan losses, which is a charge to current income. The appropriate level of the allowance is determined based on a thorough analysis of credit risk. At December 31, 1993, the allowance for loan losses was $54.3 million, or 2.03% of loans. This compares to an allowance of $57.9 million, or 2.89% of loans a year ago. This decline reflects improvement in measures of credit quality, discussed above, and improvement in the outlook for general economic conditions and its effect on borrowers. The decline in the allowance for loan losses as a percentage of loans is also attributable to the growth in low-risk loan exposures to financial asset services customers. FINANCIAL REVIEW State Street Boston Corporation The following table details the provision for loan losses and credit experience by type of loan:
CREDIT EXPERIENCE (Dollars in millions) 1993 1992 1991 1990 1989 1988 Provision for loan losses $11.3 $12.2 $60.0 $45.7 $19.4 $15.6 Charge-offs 18.5 23.5 47.8 48.1 23.7 14.3 Recoveries 2.2 3.4 2.7 3.1 4.6 4.4 Net loan charge-offs 16.3 20.1 45.1 45.0 19.1 9.9 Allowance of subsidiary purchased 1.4 Allowance for loan losses, year-end 54.3 57.9 65.9 51.0 50.3 50.0 Net loan charge-offs by loan type: Commercial and financial $14.0 $ 8.4 $32.2 $12.0 $ 5.2 $ (.2) Real estate 1.3 9.8 10.9 9.3 1.5 3.2 Consumer .9 .9 1.6 22.4 9.9 7.3 Foreign .1 1.0 .4 1.3 2.5 (.4) Total net charge-offs $16.3 $20.1 $45.1 $45.0 $19.1 $ 9.9 Non-performing loans: Commercial and financial $25.0 $37.2 $30.6 $31.5 $ 5.5 $ 2.4 Real estate .5 .9 7.9 22.7 13.5 7.3 Other 1.3 2.2 2.4 2.3 2.8 Total non-performing loans $26.8 $40.3 $40.9 $56.5 $21.8 $ 9.7 Other real estate owned $11.1 $12.5 $15.4 $15.5 Ratios: Allowance to ending loans 2.03% 2.89% 3.46% 2.42% 2.04% 2.30% Net charge-offs to average loans .63 .97 2.14 1.72 .77 .46 Non-performing loans to total loans 1.00 2.01 2.15 2.68 .88 .44
OFF-BALANCE SHEET RISK A description of State Street's management of the market and credit risk associated with off-balance sheet financial instruments such as foreign exchange contracts, indemnified securities lent, loan commitments and standby letters of credit is presented in Note P, page 49. COUNTRY RISK Country risk arises from borrowers' possible inability to repay because of the inconvertibility of their assets into dollars. At December 31, 1993, assets and commitments with country risk were $5.6 billion and included $4.8 billion of Eurocurrency placements with the balance consisting of loans, letters of credit, and foreign government bonds. NEW ACCOUNTING DEVELOPMENTS Statement of Financial Accounting Standards No. 115, ``Accounting for Certain Investments in Debt and Equity Securities'' is effective for fiscal years beginning after December 15, 1993. This statement requires that available-for- sale securities be reported at fair value, with any unrealized gains and losses, net of taxes, reflected as a separate component of stockholders' equity. Through December 31, 1993, State Street reported available-for-sale securities at the lower of amortized cost or market with any valuation adjustments reflected in fee revenue. At December 31, 1993, the fair value of the available- for-sale portfolio exceeded its aggregate amortized cost by $4.8 million. State Street will adopt this new statement in 1994. This could create variability in stockholders' equity. Statement of Financial Accounting Standards No. 114, ``Accounting by Creditors for Impairment of a Loan,'' is effective for fiscal years beginning after December 15, 1994. This statement addresses how creditors should establish allowances for credit losses on individual loans determined to be impaired. State Street plans to adopt this new statement in 1995, and it is not expected to have a material impact. APPENDIX TO EXHIBIT 13.2 Narrative description of graphic and image material appearing in paper format version of Form 10-K. Pages 22, 23, 26 and 33 contain line graphs (bar charts) of Earnings Per Share, (Page 22); Fee Revenue Compared to Fiduciary Compensation, (Page 23); Net Interest Revenue -- Taxable Equivalent, (Page 26); Stockholders' Equity at Year-End and Dividends Per Share, (Page 33). The Data points comprising these graphs appear below in tabular format. Page 22: Earnings Per Share (Fully Diluted) (Dollars) Earnings Year Per Share 1988 ......................................... $1.20 1989 ......................................... 1.38 1990 ......................................... 1.55 1991 ......................................... 1.81 1992 ......................................... 2.07 1993 ......................................... 2.33 Page 23: Fee Revenue Compared to Fiduciary Compensation (Millions of Dollars) Fiduciary Fee Year Compensation Revenue 1988 ........................ $292.8 $397.5 1989 ........................ 336.3 443.6 1990 ........................ 381.3 502.9 1991 ........................ 442.5 563.9 1992 ........................ 545.4 702.9 1993 ........................ 627.8 833.4 Page 26: Net Interest Revenue -- Taxable Equivalent (Millions of Dollars) Net Interest Revenue Year Taxable Equivalent 1988 .................................... $215.7 1989 .................................... 232.5 1990 .................................... 291.6 1991 .................................... 292.3 1992 .................................... 295.9 1993 .................................... 337.9 Page 33: Stockholders' Equity at Year-End (Millions of Dollars) Stockholders' Equity Year at Year-End 1988 .................................... $505.6 1989 .................................... 597.2 1990 .................................... 695.1 1991 .................................... 816.6 1992 .................................... 953.1 1993 .................................... 1,105.0 Dividends Per Share (Dollars) Dividends Year Per Share 1988 .................................... $.260 1989 .................................... .300 1990 .................................... .340 1991 .................................... .385 1992 .................................... .445 1993 .................................... .520 EX-13 13 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.3 TO OUR Stockholders: For State Street, 1993 was a successful year of growth, evolution and investment in our future. Revenue grew 18%. Earnings per share were up 13%. Return on stockholders' equity was 17.4%. Financial assets in our custody grew 21% to $1.6 trillion, and assets under management reached $142 billion, up 28% over last year. At year-end, the dividend rate was 17% higher than a year ago. We have increased our dividend every six months for the past 15 years. These results are strong evidence that our strategy of leveraging information technology to develop a broad, integrated product line for servicing financial assets is working well. We surpassed $1 billion of revenue for the first time in 1993. We added important new customers worldwide in all our businesses, strengthened relationships with existing customers, and introduced new and innovative services. We transferred capabilities we had established in the United States to markets around the world and adapted them for local requirements. We are seeing the benefits of focusing on cross-selling products across our customer base. More and more, our customers are buying multiple services from us. We are making increased use of our balance sheet to accommodate customers' short-term cash needs in the form of repurchase agreements and multicurrency deposits. Over one-third of the loan portfolio supports the short-term borrowing requirements of our financial asset services customers and securities brokers. We are increasing efforts to continue our growth for the long term. We made a strategic decision to increase investment spending to approximately 10% of revenue for 1993 and 1994. We are investing in information technology, product development and geographic expansion. This higher level of investment spending will strengthen our leadership in the markets we serve and position us for long-term growth. Over the past years, we have chosen to look to the future, to take the long view -- and this has been the foundation of State Street's success. In the late 1970s, we transformed ourselves from a regional bank to the leading U.S. securities custodian. Building on our strengths as the largest mutual fund custodian in the United States, we became the largest U.S. master trustee/master custodian. In the 1980s, we reexamined the marketplace and decided to expand globally to support our customers' need for a global custodian and to penetrate non-U.S. markets. Achieving sustained growth depends on our continued transformation as a provider of a full range of integrated financial asset services. We are leveraging our strengths - customer focus, advanced information technology and a highly professional global work force - to meet the demands of an increasingly competitive marketplace. Underpinning our customer focus is an obsession with quality service. Time after time, we win in the marketplace on the basis of references from satisfied customers, as well as the strength of our multi-currency accounting system; the capacity to support investment management with on-line systems; and an ability to deliver multiple products and services, not just traditional custody and accounting, quickly and effectively. We are making significant investments in our business. Two areas in which we are concentrating investment are new technology and reengineering. We are developing Global Horizon Interchanger to meet our customers' sophisticated information needs. Interchange is an open architecture that will enable customers and their investment managers to integrate the transaction processing and accounting data we maintain for them with the information they receive from their own systems, as well as from other information providers. Interchange's underlying technology adapts to our customers' systems, allowing them to download information from State Street into their software applications, share data on their local area networks and choose the speed at which information is delivered. In addition to its powerful integration capabilities and increased speed of information delivery, the importance of Global Horizon Interchange is its ability to enhance productivity - for us and for our customers. As part of our reengineering effort, we are conducting an end-to-end review of core cash and securities processing workflows. The objectives are better product delivery, higher service quality, and a significant reduction in the unit costs of fundamental custody and accounting services. We expect to benefit significantly from this effort to improve our operating processes. We are taking action to stay ahead of the competition, and we will continue to capitalize on opportunities that arise as investors implement increasingly complex global investment strategies. As you will see in the following pages, we are aligned with large and growing markets around the world. Combining our advanced information technology with banking, trust, investment and securities processing capabilities, we continue to win new business and expand existing customer relationships. Our financial objective remains sustainable real growth in earnings per share. We believe this will create value for our stockholders over the long term. It is also our goal to achieve superior long-term financial performance, which we translate into a return on equity of 18%. We are pleased that, given the increased level of investment spending, we achieved a 17.4% return on equity for 1993. Given our current assessment of our company and the markets we serve, our expectation is for continued double-digit earnings per share growth for the next few years. We are committed to continuing our transformation as we aim to be the leading global servicer of financial assets. Our success in 1993 was the result of the hard work of the 10,000 State Street employees around the world. We would like to take this opportunity to acknowledge and thank them for their contributions. Their creativity and dedication have driven our past success and will pave the way for our success in the future. Signature Marshall N. Carter Chairman and Chief Executive Officer Signature David A. Spina Vice Chairman EX-13 14 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.4 STATE STREET BOSTON CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES CONSOLIDATED STATEMENT OF INCOME State Street Boston Corporation
(Dollars in thousands, except per share data) 1993 1992 1991 INTEREST REVENUE Deposits with banks $201,455 $257,615 $261,992 Investment securities: U.S. Treasury and Federal agencies 119,495 115,745 115,599 State and political subdivisions (exempt from Federal tax) 25,185 19,345 22,923 Other investments 96,905 87,094 99,211 Loans 127,651 116,516 159,217 Securities purchased under resale agreements and Federal funds sold 114,979 109,149 69,201 Trading account assets 13,198 8,932 9,645 Total interest revenue 698,868 714,396 737,788 INTEREST EXPENSE Deposits 202,810 248,851 286,751 Other borrowings 168,423 169,905 164,244 Long-term debt 10,022 13,324 13,238 Total interest expense 381,255 432,080 464,233 Net interest revenue 317,613 282,316 273,555 Provision for loan losses - Note C 11,320 12,201 60,012 Net interest revenue after provision for loan losses 306,293 270,115 213,543 FEE REVENUE Fiduciary compensation 627,769 545,377 442,489 Other - Note K 205,646 157,503 121,394 Total fee revenue 833,415 702,880 563,883 Gain on sale of credit card loan portfolio - Note J 56,200 REVENUE BEFORE OPERATING EXPENSES 1,139,708 972,995 833,626 OPERATING EXPENSES Salaries and employee benefits - Note N 479,168 409,888 336,764 Occupancy, net 60,643 53,259 45,747 Equipment 100,295 66,965 48,427 Other - Note L 222,147 186,322 177,600 Total operating expenses 862,253 716,434 608,538 Income before income taxes 277,455 256,561 225,088 Income taxes - Note O 97,626 96,118 85,818 NET INCOME $179,829 $160,443 $139,270 EARNINGS PER SHARE Primary $2.36 $2.10 $1.86 Fully diluted 2.33 2.07 1.81 AVERAGE SHARES OUTSTANDING (in thousands) Primary 76,193 76,235 74,969 Fully diluted 77,177 77,698 77,116 The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CONDITION State Street Boston Corporation
(Dollars in thousands) December 31, 1993 1992 ASSETS Cash and due from banks - Note R $ 1,469,395 $ 1,284,467 Interest-bearing deposits with banks 5,148,249 4,803,246 Securities purchased under resale agreements - Note E 2,267,546 3,037,220 Federal funds sold 188,000 218,500 Trading account assets 159,446 164,566 Investment securities - Notes B and E: Held for investment (market value $4,507,248 and $3,173,592) 4,484,104 3,151,774 Available for sale (market value $1,221,921 and $973,118) 1,217,095 940,563 Total investment securities 5,701,199 4,092,337 Loans - Note C 2,680,174 2,003,713 Allowance for loan losses (54,316) (57,931) Net loans 2,625,858 1,945,782 Premises and equipment - Notes D and G 445,109 412,800 Customers' acceptance liability 65,643 35,011 Accrued income receivable 280,976 216,362 Other assets 368,702 279,537 TOTAL ASSETS $18,720,123 $16,489,828 LIABILITIES Deposits: Noninterest-bearing $ 5,450,183 $ 4,373,491 Interest-bearing: Domestic 2,140,457 2,269,002 Foreign 5,427,231 4,417,574 Total deposits 13,017,871 11,060,067 Federal funds purchased 269,083 623,670 Securities sold under repurchase agreements - Note E 2,972,928 2,751,416 Other short-term borrowings 469,265 135,047 Notes payable - Note F 149,990 336,381 Acceptances outstanding 65,928 35,420 Accrued taxes and other expenses - Note O 373,152 309,933 Other liabilities 167,993 138,960 Long-term debt - Note G 128,939 145,799 TOTAL LIABILITIES 17,615,149 15,536,693 Commitments and contingent liabilities - Notes P and Q STOCKHOLDERS' EQUITY -- NOTES G, H, I AND R Preferred stock, no par: authorized 3,500,000; issued none Common stock, $1 par: authorized 112,000,000; issued 75,874,000 and 75,061,000 75,874 75,061 Surplus 19,253 8,001 Retained earnings 1,009,847 870,073 TOTAL STOCKHOLDERS' EQUITY 1,104,974 953,135 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,720,123 $16,489,828
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS State Street Boston Corporation
(Dollars in thousands) 1993 1992 1991 OPERATING ACTIVITIES Net income $ 179,829 $ 160,443 $ 139,270 Noncash charges for depreciation, amortization, provision for loan losses and foreclosed properties, and deferred income taxes 163,858 117,924 117,029 Net income adjusted for noncash charges 343,687 278,367 256,299 Adjustments to reconcile to net cash provided (used) by operating activities: Securities (gains) losses, net (15,375) (12,274) (3,340) Net change in: Accrued income receivable (64,614) (9,947) (2,145) Accrued taxes and other expenses 21,286 12,187 35,823 Trading account assets 5,120 89,415 (138,605) Other, net (62,193) (16,032) (45,642) NET CASH PROVIDED BY OPERATING ACTIVITIES 227,911 341,716 102,390 INVESTING ACTIVITIES Payments for purchases of: Held-for-investment securities (3,673,561) (3,337,307) (2,028,684) Available-for-sale securities (1,364,457) Lease financing assets (426,313) (194,897) (135,779) Premises and equipment (116,379) (152,070) (109,255) Proceeds from: Maturities of held-for-investment securities 2,318,776 1,966,823 1,381,244 Maturities of available-for-sale securities 167,399 Sales of investment securities 522,012 37,884 Sales of available-for-sale securities 935,816 Sale of credit card loan portfolio 436,340 Principal collected from lease financing 45,536 48,440 59,332 Net (payments for) proceeds from: Interest-bearing deposits with banks (345,003) (972,443) (886,364) Federal funds sold and securities purchased under resale agreements 800,174 772,084 (2,809,364) Loans (617,280) (84,044) 160,420 NET CASH USED BY INVESTING ACTIVITIES (2,275,292) (1,431,402) (3,694,226) FINANCING ACTIVITIES Proceeds from issuance of: Long-term debt 99,025 Notes payable 149,868 Nonrecourse debt for lease financing 347,042 146,424 107,742 Common and treasury stock 6,035 5,810 3,261 Payments for: Maturity of notes payable (100,000) (100,000) Nonrecourse debt for lease financing (38,695) (39,572) (42,902) Long-term debt (114,213) (650) (591) Cash dividends (39,297) (33,293) (28,415) Net proceeds from (payments for): Deposits 1,957,804 2,328,706 1,073,724 Short-term borrowings 14,608 (1,099,901) 2,192,726 NET CASH PROVIDED BY FINANCING ACTIVITIES 2,232,309 1,357,392 3,205,545 NET INCREASE (DECREASE) 184,928 267,706 (386,291) Cash and due from banks at beginning of period 1,284,467 1,016,761 1,403,052 CASH AND DUE FROM BANKS AT END OF PERIOD $1,469,395 $1,284,467 $1,016,761 SUPPLEMENTAL DISCLOSURE Interest paid $ 382,310 $ 440,335 $ 462,268 Income taxes paid 56,370 63,497 58,415 The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY State Street Boston Corporation
COMMON RETAINED TREASURY (Dollars in thousands) STOCK SURPLUS EARNINGS STOCK TOTAL BALANCE AT DECEMBER 31, 1990 $36,824 $29,956 $634,896 $(6,622) $ 695,054 Net income 139,270 139,270 Cash dividends declared - $.385 per share (28,415) (28,415) Issuance of common and treasury stock - 671,066 net shares 396 3,911 6,622 10,929 Foreign currency translation (269) (269) BALANCE AT DECEMBER 31, 1991 37,220 33,867 745,482 -- 816,569 Net income 160,443 160,443 Cash dividends declared - $.445 per share (33,293) (33,293) Stock dividend, two-for-one split 37,318 (37,318) Issuance of common stock - 523,346 net shares 523 11,452 11,975 Foreign currency translation (2,559) (2,559) BALANCE AT DECEMBER 31, 1992 75,061 8,001 870,073 -- 953,135 Net income 179,829 179,829 Cash dividends declared - $.520 per share (39,297) (39,297) Issuance of common stock - 812,902 net shares 813 11,252 12,065 Foreign currency translation (758) (758) BALANCE AT DECEMBER 31, 1993 $75,874 $19,253 $1,009,847 $ -- $1,104,974 The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of State Street Boston Corporation (``State Street'') and its subsidiaries conform to generally accepted accounting principles. The significant policies are summarized below. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of State Street Boston Corporation and its subsidiaries, including its principal subsidiary, State Street Bank and Trust Company (``State Street Bank''). All significant intercompany balances and transactions have been eliminated upon consolidation. The results of operations of businesses purchased are included from the date of acquisition. State Street's investment in its 50%-owned affiliate, Boston Financial Data Services, Inc., is accounted for by the equity method. Certain previously reported amounts have been reclassified to conform to the current method of presentation. Where appropriate, number of shares and per share amounts have been restated to reflect a stock split in 1992 (see Note H). For the Consolidated Statement of Cash Flows, State Street has defined cash equivalents as those amounts included in the Statement of Condition caption, ``Cash and due from banks.'' SECURITIES: Debt securities are held in both the investment and trading account portfolios. In 1992, State Street modified its accounting policy for debt securities, classifying a portion of its investment portfolio as available for sale. Debt securities for which there exist the ability and intent to hold to maturity are classified as held for investment and are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities classified as available for sale are intended to be held for indefinite periods of time, but not necessarily to maturity. Available-for-sale securities are carried at the lower of amortized cost or market, with any valuation adjustments reflected in fee revenue. Securities classified as available for sale are purchased in connection with State Street's interest-rate risk management and may be sold in response to changes in interest rates and other factors. Gains or losses on securities sold are computed based on identified costs and included in fee revenue. Trading account assets are held in anticipation of short-term market movements and for resale to customers. Trading account assets are carried at market value, and the resulting adjustment is reflected in fee revenue. In 1993, Statement of Financial Accounting Standards No. 115, ``Accounting for Certain Investments in Debt and Equity Securities,'' was issued. This statement requires that available-for-sale securities be reported at fair value, with unrealized gains and losses, net of taxes, reported in a separate component of stockholders' equity. State Street will adopt this new statement in 1994. 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. Subsidiaries of State Street provide asset-based financing to customers through a variety of lease arrangements. Direct financing leases are carried at the aggregate of lease payments receivable plus estimated residual value less unearned revenue. Revenue on direct financing leases is recognized on a basis calculated to achieve a constant rate of return on the outstanding net receivable balance. 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 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 their effect on borrowers, and the performance of individual credits in relation to contract terms. 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. In 1993, Statement of Financial Accounting Standards No. 114, ``Accounting by Creditors for Impairment of a Loan,'' was issued. This statement addresses how creditors should establish allowances for credit losses on individual loans determined to be impaired. State Street plans to adopt this new statement in 1995, and it is not expected to have a material impact. PREMISES AND EQUIPMENT: Premises, equipment and leasehold improvements 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. OTHER REAL ESTATE OWNED (OREO): OREO includes properties acquired in satisfaction of debt and loans considered to be in-substance foreclosures. The properties are carried at the lower of cost or fair market value and are included in other assets. Reductions in carrying value are recognized through charges to other operating expenses. The costs of maintaining and operating foreclosed properties are expensed as incurred. FOREIGN CURRENCY TRANSLATION: The assets and liabilities of foreign 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 foreign subsidiaries, net of foreign currency hedges and related taxes, are credited or charged to retained earnings. Gains or losses from other translations are included in fee revenue. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN EXCHANGE TRADING: Foreign exchange trading positions are valued daily, at prevailing exchange rates, and the resulting gain or loss is included in fee revenue. INTEREST-RATE CONTRACTS: State Street uses interest-rate contracts as part of its overall interest-rate risk management. Gains and losses on interest-rate futures and option contracts that are designated as hedges and effective as such are deferred and amortized over the remaining life of the hedged assets or liabilities as an adjustment to interest revenue or expense. Interest-rate swap contracts that are entered into as a part of interest-rate management are accounted for using the accrual method as an adjustment to interest expense. Interest-rate contracts related to trading activities are adjusted to market value with the resulting gains or losses included in fee revenue. INCOME TAXES: The provision for income taxes includes deferred income taxes arising as a result of reporting some items of revenue and expense in different years for tax and financial reporting purposes. In 1993, State Street adopted Statement of Financial Accounting Standards No. 109, ``Accounting for Income Taxes,'' which prescribes the liability method of accounting for income taxes. Prior years, which were accounted for under the deferral method, were not restated, and the impact of the adoption in 1993 was not material. EARNINGS PER SHARE: The computation of primary earnings per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Stock option grants are included only in periods when the results are dilutive. The computation of fully diluted earnings per share additionally includes the assumption that the convertible debt had been converted as of the beginning of each period, with the elimination of related interest expense less the income tax benefit. NOTE B INVESTMENT SECURITIES Investment securities consisted of the following at December 31:
1993 1992 BOOK UNREALIZED Market Book Unrealized Market (Dollars in thousands) VALUE GAINS LOSSES Value Value Gains Losses Value HELD FOR INVESTMENT U.S. Treasury and Federal agencies $1,272,370 $11,522 $ 1,673 $1,282,219 $996,294 $13,980 $2,092 $1,008,182 State and political subdivisions 1,083,879 7,006 494 1,090,391 450,980 5,432 83 456,329 Asset-backed securities 2,028,099 9,800 4,345 2,033,554 1,617,730 9,798 5,058 1,622,470 Other investments 99,756 1,398 70 101,084 86,770 200 359 86,611 Total 4,484,104 29,726 6,582 4,507,248 3,151,774 29,410 7,592 3,173,592 AVAILABLE FOR SALE U.S. Treasuries 1,121,605 9,000 4,597 1,126,008 940,563 32,898 343 973,118 Other investments 95,490 423 95,913 Total 1,217,095 9,423 4,597 1,221,921 940,563 32,898 343 973,118 Total investment securities $5,701,199 $39,149 $11,179 $5,729,169 $4,092,337 $62,308 $7,935 $4,146,710
The book and market value of investment securities by maturity at December 31, 1993, were as follows: WITHIN AFTER ONE AFTER FIVE AFTER ONE YEAR BUT WITHIN BUT WITHIN TEN (Dollars in thousands) OR LESS FIVE YEARS TEN YEARS YEARS HELD FOR INVESTMENT Book value $2,550,772 $1,693,413 $196,563 $43,356 Market value 2,558,234 1,705,662 $198,251 $45,101 AVAILABLE FOR SALE Book value 388,570 828,525 Market value 396,394 825,527 The maturity of asset-backed securities is based upon the expected principal payments. Securities carried at $2,656,300,000 and $2,770,800,000 at December 31, 1993 and 1992, respectively, were designated as security for public and trust deposits, borrowed funds and for other purposes as provided by law. During 1993, gains of $15,426,000 and losses of $51,000 were realized on sales of available-for-sale securities of $935,816,000. During 1992, gains of $14,201,000 and losses of $1,927,000 were realized on sales of investment securities of $522,012,000. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE C LOANS The loan portfolio consisted of the following at December 31: (Dollars in thousands) 1993 1992 Commercial and financial $1,889,143 $1,519,037 Real estate 94,073 105,156 Consumer 46,315 64,841 Foreign 325,142 62,918 Lease financing 325,501 251,761 Total loans $2,680,174 $2,003,713 Non-accrual loans $ 26,804 $ 40,277 Interest revenue under original terms 2,796 4,470 Interest revenue recognized 812 1,449 Changes in the allowance for loan losses for the years ended December 31 were as follows: (Dollars in thousands) 1993 1992 1991 Balance at beginning of year $57,931 $65,888 $50,975 Provision for loan losses 11,320 12,201 60,012 Loan charge-offs (18,545) (23,514) (47,770) Recoveries 2,205 3,356 2,671 Allowance of subsidiary purchased 1,405 Balance at end of year $54,316 $57,931 $65,888 Loans totaling $12,914,000 were restructured in 1993, are performing in accordance with their new terms and are accruing at a market rate. During 1993 and 1992, loans totaling $1,387,000 and $3,473,000 were transferred to other real estate owned. NOTE D PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31: (Dollars in thousands) 1993 1992 Buildings and land $248,584 $237,554 Leasehold improvements 97,983 75,970 Equipment and furniture 395,895 319,084 742,462 632,608 Accumulated depreciation and amortization (297,353) (219,808) Total premises and equipment, net $445,109 $412,800 State Street has entered into noncancelable operating leases for premises and equipment. At December 31, 1993, future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more totaled $486,693,000. This consisted of $28,371,000, $26,832,000, $31,416,000, $30,054,000 and $26,715,000 for the years 1994 to 1998, respectively, and $343,305,000 thereafter. The minimum rental commitments have been reduced by sublease rental commitments of $10,581,000. Substantially all leases include renewal options. Total rental expense amounted to $25,641,000, $23,194,000 and $21,535,000 in 1993, 1992 and 1991, respectively. Rental expense has been reduced by sublease revenue of $2,149,000, $3,515,000 and $879,000 in 1993, 1992 and 1991, respectively. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE E REPURCHASE AND RESALE AGREEMENTS State Street enters into sales of U.S. Treasury and Federal agency securities (``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. State Street enters into purchases of U.S. Government securities under agreements to resell the securities, which are recorded as securities purchased under resale agreements in the Consolidated Statement of Condition. These securities can be used as collateral for repurchase agreements. It is State Street's policy to take possession or control of the security underlying the resale agreement. The securities are revalued daily to determine if additional collateral is necessary. NOTE F NOTES PAYABLE At December 31, 1993, State Street Bank had outstanding $100 million of 5.65% Bank Notes with a two-year maturity and due April, 1994, and $50 million of 5.30% Bank Notes with a two-year maturity and due June, 1994. The Bank Notes, which are not subject to redemption, represent unsecured debt obligations of State Street Bank. The Bank Notes are neither obligations of or guaranteed by State Street and are recorded net of original issue discount. NOTE G LONG-TERM DEBT Long-term debt, less unamortized original issue discount, consisted of the following at December 31: (Dollars in thousands) 1993 1992 5.95% Notes due 2003 $ 99,634 $ 8.50% Notes due 1996 74,856 7.75% Convertible subordinated debentures due 2008 3,922 6,343 9.50% Mortgage note due 2009 25,304 26,018 10.13% Mortgage note due 1993 38,500 Other 79 82 Total long-term debt $128,939 $145,799 The 5.95% and the 8.50% notes are unsecured obligations of State Street. The 8.50% notes were redeemed in November, 1993, at par. The 7.75% debentures are convertible to common stock at a price of $5.75 per share, subject to adjustment for certain events. The debentures are redeemable, at the option of State Street, at a price of approximately 102.5%, declining annually to par by 1998. During 1993 and 1992, $2,422,000 and $602,000 of debentures were converted into 422,716 and 104,677 shares of common stock, respectively. At December 31, 1993, 682,000 shares of authorized common stock have been reserved for issuance upon conversion. The 9.5% mortgage note was fully collaterized by property at December 31, 1993. The aggregate maturities of this mortgage note for the years 1994 through 1998 are $785,000, $863,000, $948,000, $1,042,000 and $1,146,000, respectively. The 10.13% mortgage note was assumed with the purchase of property and matured in February, 1993. In August, 1993, a shelf registration statement became effective that allows State Street to issue up to $250 million of unsecured debt securities. In September, 1993, State Street issued $100 million of 5.95% Notes due 2003, and the remaining balance of $150 million at December 31, 1993, is available for issuance. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE H STOCKHOLDERS' EQUITY In 1992, State Street distributed a two-for-one stock split in the form of a 100% stock dividend to stockholders. The par value of these additional shares was capitalized by a transfer from surplus to common stock. In 1993, the Board of Directors authorized the repurchase of up to two million shares of State Street's common stock. Shares purchased under the authorization, if any, would be used for employee benefit plans. No purchases were made through December 31, 1993. State Street has long-term incentive plans from which stock options, stock appreciation rights (SARs) and performance shares can be awarded. The exercise price of non-qualified and incentive stock options may not be less than fair value of such shares at date of grant and expire no longer than ten years from date of grant. Performance shares have been granted to officers at the policy- making level. Performance shares are earned over a performance period based on achievement of goals. Payment for performance shares is made in cash equal to the fair market value of the common stock after the conclusion of each performance period. Compensation expense related to performance shares was $2,126,000, $8,124,000 and $4,159,000 for 1993, 1992 and 1991, respectively. Under the 1989 Stock Option Plan, options and SARs covering 2,800,000 shares of common stock may be issued. Under the 1990 Stock Option and Performance Shares Plan, options and SARs covering 2,000,000 shares of common stock and 2,000,000 performance shares may be issued. State Street has stock options and performance shares outstanding from previous plans under which no further grants can be made. Option activity during 1993 and 1992 was as follows: (In thousands, except per share amounts) Option Price Shares Per Share Total Outstanding, December 31, 1991 3,016 $ 3.52-26.94 $48,862 Granted 192 32.25-40.69 6,324 Exercised (526) 3.95-20.38 (6,138) Canceled (22) 12.03-20.72 (355) Outstanding, December 31, 1992 2,660 3.52-40.69 48,693 Granted 160 32.38-45.31 7,057 Exercised (393) 3.52-20.38 (6,273) Canceled (31) 11.23-45.31 (701) Outstanding, December 31, 1993 2,396 3.95-45.31 $48,776 At December 31, 1993, 1,004,428 shares under options were exercisable and 2,903,000 shares under options and SARs were available for future grants. During 1991, 884,000 options were exercised at per share prices of $1.46 to $16.38. NOTE I SHAREHOLDERS' RIGHTS PLAN In 1988, State Street declared a dividend of one preferred share purchase right for each outstanding share of common stock. In 1992, State Street's common stock was split two-for-one in the form of a 100% stock dividend to shareholders. After giving effect to the split, under certain conditions, a right may be exercised to purchase one two-hundredths share of a series of participating preferred stock at an exercise price of $75, subject to adjustment. The rights become exercisable if a party acquires or obtains the right to acquire 20% or more of State Street's common stock or after commencement or public announcement of an offer for 20% 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 acquiror, having a market value of two times the then current exercise price of that right. The rights expire in 1998 and may be redeemed at a price of $.005 per right at any time prior to expiration or the acquisition of 20% of State Street's common stock. Also, under certain circumstances, the rights may be redeemed after they become exercisable and may be subject to automatic redemption. NOTE J SALE OF CREDIT CARD LOAN PORTFOLIO In January, 1991, State Street sold its $431,000,000 credit card loan portfolio resulting in a pre-tax gain of $56,200,000, which increased net income by $32,600,000, equal to $.44 primary and $.43 fully diluted per share. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE K FEE REVENUE - OTHER The Other category of fee revenue consisted of the following for the years ended December 31: (Dollars in thousands) 1993 1992 1991 Foreign exchange trading $ 82,705 $ 57,904 $ 39,255 Processing service fees 46,083 30,414 19,765 Service fees 40,038 31,281 23,330 Securities gains, net 15,375 12,274 3,340 Bank card fees 4,254 4,930 13,278 Trading account profits 3,740 2,714 4,330 Other 13,451 17,986 18,096 Total fee revenue - other $205,646 $157,503 $121,394 NOTE L OPERATING EXPENSES - OTHER The Other category of operating expenses consisted of the following for the years ended December 31: (Dollars in thousands) 1993 1992 1991 Contract services $ 64,080 $ 45,364 $ 47,344 Professional services 35,358 30,120 24,703 Telecommunications 21,326 18,119 14,673 Advertising and sales promotion 18,672 15,079 11,098 Postage, forms and supplies 17,927 16,847 16,448 FDIC and other insurance 17,263 16,906 12,438 Operating and processing losses 4,745 6,965 17,702 Other 42,776 36,922 33,194 Total operating expenses - other $222,147 $186,322 $177,600 NOTE M QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations:
(In thousands, except 1993 QUARTERS 1992 Quarters per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First Interest revenue $186,832 $176,820 $171,831 $163,385 $169,429 $179,363 $183,606 $181,998 Interest expense 103,959 93,823 96,336 87,137 94,614 107,801 115,123 114,542 Net interest revenue 82,873 82,997 75,495 76,248 74,815 71,562 68,483 67,456 Provision for loan losses 2,880 2,880 2,880 2,680 2,495 1,897 1,906 5,903 Net interest revenue after provision for loan losses 79,993 80,117 72,615 73,568 72,320 69,665 66,577 61,553 Fee revenue 222,670 211,432 205,306 194,007 183,758 182,036 169,587 167,499 Total revenue 302,663 291,549 277,921 267,575 256,078 251,701 236,164 229,052 Operating expenses 229,100 218,425 211,609 203,119 188,787 183,728 175,138 168,781 Income before income taxes 73,563 73,124 66,312 64,456 67,291 67,973 61,026 60,271 Income taxes 25,879 26,851 23,095 21,801 23,653 26,101 22,325 24,039 Net Income $ 47,684 $ 46,273 $ 43,217 $ 42,655 43,638 $ 41,872 $ 38,701 $ 36,232 Earnings Per Share: Primary $.62 $.61 $.57 $.56 $.57 $.55 $.51 $.48 Fully diluted .62 .60 .56 .55 .56 .54 .50 .47 Average Shares Outstanding: Primary 76,399 76,167 76,046 76,749 76,470 76,315 76,137 75,985 Fully diluted 77,224 77,141 77,120 77,851 77,745 77,514 77,409 77,256
NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE N EMPLOYEE BENEFIT PLANS State Street and its U.S. subsidiaries participate in a noncontributory cash balance defined benefit plan covering employees based on age and service. The plan provides individual account accumulations that are increased annually based on salary, service and interest credits. State Street uses the projected unit credit method as its actuarial valuation method. It is State Street's funding policy to contribute annually the maximum amount that can be deducted for Federal income tax purposes. Employees in non-U.S. offices participate in local plans, and the cost of these plans is not material. The following table sets forth the primary plan's funded status, actuarial assumptions and amounts recognized in the consolidated financial statements as of and for the years ended December 31:
(Dollars in thousands) 1993 1992 1991 Accumulated benefit obligation: Vested $ 91,186 $ 77,331 $ 68,110 Nonvested 10,527 9,075 5,127 Additional benefits based on estimated future salary levels 12,465 10,738 10,233 Projected benefit obligation 114,178 97,144 83,470 Plan assets at fair value, primarily listed stocks and fixed income securities 162,690 148,102 147,033 Excess of plan assets over projected benefit obligation 48,512 50,958 63,563 Unrecognized net asset at transition being amortized over 17.2 years (19,771) (21,699) (23,627) Unrecognized net gain (3,152) (4,291) (16,719) Unrecognized prior service cost (3,770) (4,042) (4,313) Total prepaid pension expense included in other assets $ 21,819 $ 20,926 $ 18,904 Pension expense (income) included the following components: Service cost-benefits earned during period $ 10,030 $ 9,423 $ 7,672 Interest cost on projected benefit obligation 6,142 6,812 5,991 Actual return on plan assets (22,874) (8,306) (28,637) Net amortization and deferral 5,809 (9,951) 9,625 Total pension income $ (893) $ (2,022) $ 5,349) Actuarial assumptions: Discount rate used to determine benefit obligation 7.50% 8.50% 9.00% Rate of increase in future compensation level 5.00% 5.00% 6.00% Expected long-term rate of return on plan assets 10.25% 10.25% 11.00%
State Street has an unfunded, non-qualified supplemental retirement plan that provides certain officers with defined pension benefits in excess of limits imposed by Federal tax law. At December 31, 1993, 1992 and 1991, the projected benefit obligation of this plan was $2,790,000, $2,174,000 and $1,986,000, and the related pension expense was $400,000, $430,000 and $95,000, respectively. Total pension expense (income) for all plans was $2,050,000, $424,000 and $(3,631,000) for 1993, 1992 and 1991, respectively. Employees of State Street Bank and certain subsidiaries with one or more years of service are eligible to contribute a portion of their pre-tax salary to a 401(k) Salary Savings Plan. State Street matches a portion of these contributions, and the related expenses were $5,942,000, $4,796,000 and $4,153,000 for 1993, 1992 and 1991, respectively. State Street Bank and certain subsidiaries provide health care and life insurance benefits for retired employees. In 1993, Statement of Financial Accounting Standards No. 106, ``Employers' Accounting for Postretirement Benefits Other than Pension,'' was adopted. This statement requires that the costs associated with providing postretirement benefits be accrued during the active service periods of the employee, rather than expensing these costs as paid. State Street has elected to amortize the accumulated postretirement benefit obligation (APBO), which at the date of adoption was $22,100,000, over a 20-year period. State Street continues to fund medical and life insurance benefit costs on a pay-as-you go basis. In previous years, the cost of these benefits was expensed as claims were paid and was not material. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE N EMPLOYEE BENEFIT PLANS (CONTINUED) The following table sets forth the financial status of the plan and amounts recognized in the consolidated financial statements as of and for the year ended December 31, 1993: (Dollars in thousands) 1993 Accumulated postretirement benefit obligation: Retirees $ 5,553 Fully eligible active employees 5,333 Other active employees 16,383 APBO 27,269 Unrecognized transition obligation (20,968) Unrecognized net loss (2,969) Accrued postretirement benefit cost $ 3,332 Postretirement expense included the following components: Service cost-benefits earned during the period $ 1,491 Interest cost on APBO 1,835 Net amortization and deferral 1,104 Total postretirement expense $ 4,430 The discount rate used in determining the APBO was 7.5% and the assumed health care cost trend rate used in measuring the APBO was 14% in 1994, declining to 6% by 2005, and remaining at 6% thereafter. If the health care trend rate assumptions were increased by 1%, the APBO, as of December 31, 1993, would have increased by 8%, and the aggregate of service and interest cost for 1993 would have increased by 8%. NOTE O INCOME TAXES The provision for income taxes includes deferred income taxes arising as a result of reporting certain items of revenue and expense in different years for tax and financial reporting purposes. In 1993, State Street adopted Statement of Financial Accounting Standards No. 109, ``Accounting for Income Taxes,'' which prescribes the liability method of accounting for income taxes. The impact of the adoption in 1993 was not material. The provision for income taxes included in the Consolidated Statement of Income consisted of the following: (Dollars in thousands) 1993 1992 1991 Current: Federal $22,572 $30,643 $39,060 State 16,665 19,799 26,444 Foreign 16,456 10,893 8,131 Total current 55,693 61,335 73,635 Deferred: Federal 27,002 24,420 9,481 State 14,931 10,363 2,702 Total deferred 41,933 34,783 12,183 Total income taxes $97,626 $96,118 $85,818 Current and deferred taxes for 1991 and 1992 have been reclassified to reflect the tax returns as actually filed. Income tax benefits of $3,603,000, $5,570,000 and $4,397,000 in 1993, 1992 and 1991, respectively, related to certain employee stock option exercises were recorded directly to stockholders' equity and are not included in the table above. Income taxes related to net securities gains were $6,634,000, $5,118,000 and $1,412,000 for 1993, 1992 and 1991, respectively. Pre-tax income attributable to operations located outside the United States was $51,823,000, $34,723,000 and $20,785,000 in 1993, 1992 and 1991, respectively. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE O INCOME TAXES (CONTINUED) Significant components of the deferred tax liabilities and assets were as follows: (Dollars in thousands) 1993 Deferred tax liabilities: Lease financing transactions $217,713 Depreciation 11,647 Investment securities 8,777 Prepaid pension expense 8,155 Other 7,693 Total deferred tax liabilities 253,985 Deferred tax assets: Operating expenses 26,682 Allowance for loan losses 22,516 Alternative minimum tax credit 11,589 Other 10,317 Total deferred tax assets 71,104 Valuation allowance for deferred tax assets (3,228) Net deferred tax assets 67,876 Net deferred tax liabilities $186,109 At December 31, 1993, State Street had non-U.S. carryforward tax losses of $10,659,000 and U.S. tax credit carryforwards of $11,589,000. If not utilized, $6,413,000 of the losses will expire in the years 1995-2000. The credits and the remaining losses carry over indefinitely. The provision for deferred income taxes for the years ended December 31, 1992 and December 31, 1991 consisted of the following: (Dollars in thousands) 1992 1991 Lease financing transactions $30,771 $16,413 Provision for loan losses 3,363 (6,305) Other, net 649 2,075 Total deferred $34,783 $12,183 A reconciliation of the differences between the U.S. statutory income tax rate and the effective tax rates based on income before taxes is as follows: 1993 1992 1991 U.S. Federal income tax rate 35.0% 34.0% 34.0% Changes from statutory rate resulting from: State taxes, net of Federal benefit 7.1 7.8 8.5 Tax exempt interest revenue, net of disallowed interest (3.6) (3.1) (4.4) Tax credits (3.6) (1.6) (.4) Other, net .3 .4 .4 Effective tax rate 35.2% 37.5% 38.1% NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE P OFF-BALANCE SHEET FINANCIAL INSTRUMENTS State Street uses various off-balance sheet financial instruments to satisfy the financing needs of customers, manage interest-rate and currency risk and conduct trading activities. These instruments generate fee, interest or trading revenue. Associated with these instruments are market and credit risks that could expose State Street to potential losses. Market risk relates to the possibility that financial instruments may change in value due to future fluctuations in market prices. Credit risk relates to the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract. The credit risk associated with off- balance sheet financial instruments is managed in conjunction with State Street's balance sheet activities. Historically, the credit losses experienced with respect to these instruments have been immaterial. The following is a summary of the contractual or notional amount of State Street's off-balance sheet financial instruments: (Dollars in millions) 1993 1992 Financial instruments whose contractual amounts represent credit risk: Loan commitments $ 2,356 $ 1,595 Standby letters of credit 799 471 Letters of credit 140 115 Indemnified securities lent 12,432 9,582 Financial instruments whose contractual or notional amount exceeds the amount of credit risk: Foreign exchange commitments 36,179 16,737 Interest-rate contracts: Futures 691 72 Swap agreements 158 265 In conjunction with its lending activities, State Street enters into various commitments to extend credit and issues letters of credit. Loan commitments (unfunded loans and unused lines of credit), standby letters of credit and letters of credit are issued to accommodate the financing needs of State Street's customers. Loan commitments are essentially agreements by State Street to lend monies at a future date, so long as there are no violations of any conditions established in the agreement. Standby letters of credit and letters of credit commit State Street to make payments on behalf of customers when certain specified events occur. These loan and letter-of-credit commitments are subject to the same credit policies and reviews as loans on the balance sheet. Collateral, both the amount and nature, is obtained based upon management's assessment of the credit risk. Approximately 70% of the loan commitments expire in one year or less from the date of issue. Since many of the extensions of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. On behalf of its customers, State Street lends their securities to creditworthy brokers and other institutions. In certain circumstances, State Street indemnifies its customers for the fair market value of those securities against a failure of the borrower to return such securities. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 102% of the fair market value of the securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. State Street held as collateral, cash and U.S. Government securities totaling $12.8 billion and $9.8 billion for indemnified securities at December 31, 1993 and 1992, respectively. State Street enters into a variety of foreign exchange and interest-rate contracts with counterparties that may expose it to currency and interest-rate risk on behalf of its customers, in managing its own exposure and through trading activities. Foreign exchange and interest-rate futures contracts are commitments to buy or sell at a future date a currency or financial instrument at a contracted price, and may be settled in cash or through delivery of the contracted instrument. Interest-rate swap agreements involve the exchange of interest payments, either at a fixed or variable rate, based on a notional amount without the exchange of the underlying principal amount. State Street's exposure from these foreign exchange and interest-rate contracts results from the possibility that one party may default on its contractual obligation or from movements in exchange or interest rates. 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 outstanding at year- end. State Street minimizes its credit risk in this area by performing credit reviews of its counterparties and by conducting its activities through organized exchanges. There may be considerable day-to-day variation in exposure because of changing expectations of future currency values or interest rates. State Street actively manages its market risk exposure. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE Q CONTINGENT LIABILITIES State Street provides custody, accounting and information services to mutual fund, master trust/master custody/global custody, corporate trust and defined contribution plan customers; and investment management services to institutions and individuals. Assets under custody and management, held by State Street in a fiduciary or custody capacity, are not included in the Consolidated Statement of Condition since such items are not assets of State Street. Management conducts regular reviews of its responsibilities for these services and considers the results in preparing its financial statements. In the opinion of management, there are no contingent liabilities at December 31, 1993 that would have a material adverse effect on State Street's financial position or results of operations. State Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these can be successfully defended or resolved without a material adverse effect on State Street's financial position or results of operations. NOTE R CASH, DIVIDEND AND LOAN RESTRICTIONS During 1993, subsidiary banks of State Street were required by the Federal Reserve Bank to maintain average reserve balances of $221,941,000. State Street's principal source of funds for the payment of cash dividends to stockholders is from dividends paid by State Street Bank. Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to State Street. At December 31, 1993, State Street Bank had $366,454,000 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, 1993, consolidated retained earnings included $4,847,000 of undistributed earnings of Boston Financial Data Services, Inc., a 50%-owned affiliate. NOTE S FAIR VALUE OF FINANCIAL INSTRUMENTS Financial Accounting Standards No. 107 requires the calculation and disclosure of the fair value of financial instruments. 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 book value. The following methods were used to estimate the fair value of financial instruments. For financial instruments that have quoted market prices, those quotes were 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 were available, financial instruments were valued by discounting the expected cash flow(s) using an estimated current market interest rate for the financial instrument. Fair value approximates reported book value for the following balance sheet captions: Cash and due from banks; Interest-bearing deposits with banks; Securities purchased under resale agreements; Federal funds sold; Deposits; Federal funds purchased; Securities sold under repurchase agreements; and Other short-term borrowings. The reported book value and fair value for other balance sheet captions are as follows: 1993 1992 BOOK FAIR Book Fair (Dollars in millions) VALUE VALUE Value Value Investment securities $5,701 $5,729 $4,092 $4,147 Net loans (excluding leases) 2,300 2,301 1,696 1,697 Notes payable 150 150 336 339 Long-term debt 129 133 146 152 The fair value of off-balance sheet financial instruments is measured by determining the cost to close out the contract. The cost for interest-rate swap agreements is $1 million for 1993 and $4 million for 1992. There is no cost for loan commitments. NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE T FOREIGN ACTIVITIES Foreign activities, as defined by the Securities and Exchange Commission, are considered to be those revenue-producing assets and transactions that arise from customers domiciled outside the United States. Due to the nature of the Corporation's business, it is not possible to segregate precisely domestic and foreign activities. The determination of earnings attributable to foreign activities requires internal allocations for resources common to foreign and domestic activities. Subjective judgments have been used to arrive at these operating results for foreign activities. Interest expense allocations are based on the average cost of short-term domestic borrowed funds. Allocations for operating expenses and certain administrative costs are based on services provided and received. The following data relates to foreign activities, based on the domicile location of customers, for the years ended and as of December 31: (Dollars in thousands) 1993 1992 1991 Condensed Statement of Income: Interest revenue $ 226,213 $ 264,589 $ 277,426 Interest expense 158,392 209,094 231,646 Net interest revenue 67,821 55,495 45,780 Provision for loan losses 1,073 467 23 Fee revenue 129,942 107,350 79,769 Total revenue 196,690 162,378 125,526 Operating expenses 140,492 117,887 82,859 Net income before taxes 56,198 44,491 42,667 Income taxes 22,171 20,380 20,604 Net Income $ 34,027 $ 24,111 $ 22,063 Assets: Interest-bearing deposits with banks $5,148,201 $4,803,196 $3,830,803 Loans and other assets 645,579 253,896 175,515 Total Assets $5,793,780 $5,057,092 $4,006,318 NOTE U FINANCIAL STATEMENTS OF STATE STREET BOSTON CORPORATION (PARENT ONLY) Statement of Condition (Dollars in thousands) December 31, 1993 1992 Assets Cash and due from banks $ 454 $ 80 Securities purchased under resale agreements 65,068 28,578 Investment securities - available for sale 35,030 35,161 Investment in consolidated subsidiaries: Bank 1,067,080 931,669 Nonbank 39,940 37,290 Investment in unconsolidated affiliate 11,364 9,698 Capital notes of bank subsidiary 18,211 18,211 Notes receivable from nonbank subsidiaries 7,687 5,286 Other assets 2,383 1,996 Total Assets $1,247,217 $1,067,969 Liabilities Accrued taxes and other expenses $27,985 $24,546 Other liabilities 10,624 9,007 Long-term debt 103,634 81,281 Total Liabilities 142,243 114,834 Stockholders' Equity 1,104,974 953,135 Total Liabilities and Stockholders' Equity $1,247,217 $1,067,969 NOTES TO FINANCIAL STATEMENTS State Street Boston Corporation NOTE U FINANCIAL STATEMENTS OF STATE STREET BOSTON CORPORATION (PARENT ONLY) (CONTINUED) Statement of Income
(Dollars in thousands) 1993 1992 1991 Dividends from bank subsidiary $ 46,400 $ 28,500 $ 32,000 Dividends and interest revenue 4,228 5,208 6,329 Fee revenue 201 Gain on sale of credit card loan portfolio - Note J 9,993 Total revenue 50,628 33,909 48,322 Interest on long-term debt 7,276 6,926 7,106 Other expenses 1,678 1,543 1,265 Total expenses 8,954 8,469 8,371 Income tax expense (benefit) (1,873) (1,544) 2,958 Income before equity in undistributed income of subsidiaries 43,547 26,984 36,993 Equity in undistributed income of subsidiaries and affiliate: Consolidated bank 132,688 132,464 101,303 Consolidated nonbank 1,528 791 916 Unconsolidated affiliate 2,066 204 58 136,282 133,459 102,277 Net Income $179,829 $160,443 $139,270
Statement of Cash Flows
(Dollars in thousands) 1993 1992 1991 Operating Activities Net income $179,829 $160,443 $139,270 Equity in undistributed income of subsidiaries and affiliate (136,282) (133,459) (102,277) Other, net 5,403 8,273 15,452 Net Cash Provided by Operating Activities 48,950 35,257 52,445 Investing Activities Net (payments for) proceeds from: Investment in bank subsidiary (40,500) Investment in nonbank subsidiary (1,000) Securities purchased under resale agreement (36,491) 37,774 2,192 Investment securities (5,135) (20,444) Notes receivable from nonbank subsidiaries (2,248) 500 500 Other, net 400 (548) (9,490) Net Cash Used by Investing Activities (39,339) (7,909) (27,242) Financing Activities Proceeds from issuance of long-term debt 99,025 Payment of long-term debt (75,000) Proceeds from issuance of common and treasury stock 6,035 5,810 3,261 Payments for cash dividends (39,297) (33,293) (28,415) Net Cash Used by Financing Activities (9,237) (27,483) (25,154) Net Increase (Decrease) 374 (135) 49 Cash and due from banks at beginning of period 80 215 166 Cash and Due from Banks at End of Period $ 454 $ 80 $ 215
REPORT OF INDEPENDENT AUDITORS The Stockholders and Board of Directors State Street Boston Corporation We have audited the accompanying consolidated statements of condition of State Street Boston Corporation as of December 31, 1993 and 1992, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1993. 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 generally accepted auditing standards. 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 Boston Corporation at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. /s/Ernst & Young Boston, Massachusetts January 13, 1994 SUPPLEMENTAL FINANCIAL DATA State Street Boston Corporation
CONDENSED AVERAGE STATEMENT OF CONDITION WITH NET INTEREST REVENUE ANALYSIS (TAXABLE EQUIVALENT BASIS) 1993 AVERAGE AVERAGE (Dollars in millions) BALANCE INTEREST RATE ASSETS Interest-bearing deposits with banks $ 5,022 $201.6 4.01% Securities purchased under resale agreements 3,255 102.4 3.14 Federal funds sold 413 12.6 3.06 Trading account assets 369 15.6 4.21 Investment securities: U.S. Treasury and Federal agencies 2,077 119.5 5.75 State and political subdivisions 683 37.8 5.54 Other investments 1,827 97.4 5.33 Total investment securities 4,587 254.7 5.55 Loans: Commercial and financial 1,865 89.8 4.81 Real estate 97 6.8 6.97 Consumer 53 3.6 6.81 Foreign 282 16.4 5.82 Lease financing 279 15.7 5.61 Total loans 2,576 132.3 5.14 TOTAL INTEREST-EARNING ASSETS 16,222 719.2 4.43 Cash and due from banks 911 Allowance for loan losses (58) Premises and equipment 435 Customers' acceptance liability 33 Other assets 626 TOTAL ASSETS $18,169 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings $ 2,167 52.2 2.41 Time 157 4.5 2.88 Foreign 4,954 146.1 2.95 Total interest-bearing deposits 7,278 202.8 2.79 Federal funds purchased 741 21.0 2.84 Securities sold under repurchase agreements 4,134 119.4 2.89 Other short-term borrowings 216 8.2 3.78 Notes payable 511 19.9 3.90 Long-term debt 122 10.0 8.19 TOTAL INTEREST-BEARING LIABILITIES 13,002 381.3 2.93 Noninterest-bearing deposits 3,623 Acceptances outstanding 34 Other liabilities 477 Stockholders' equity 1,033 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,169 Net interest revenue $337.9 Excess of rate earned over rate paid 1.50% NET INTEREST MARGIN* 2.08% *Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets.
1992 1991 1990 1989 Average Average Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate $ 5,102 $257.7 5.05% $ 3,646 $262.1 7.19% $ 2,733 $252.7 9.25% $ 1,389 $137.2 9.88% 2,603 97.6 3.75 913 51.4 5.63 246 20.0 8.12 149 13.1 8.98 330 11.6 3.51 305 17.8 5.83 470 38.2 8.14 484 45.0 9.24 226 10.1 4.45 152 11.9 7.80 129 12.5 9.60 110 9.9 9.03 1,703 115.7 6.80 1,417 115.6 8.16 1,634 138.4 8.47 1,706 137.4 8.06 376 29.0 7.72 378 34.4 9.09 338 32.1 9.51 227 20.5 9.06 1,444 87.9 6.09 1,212 100.8 8.32 776 70.8 9.13 421 38.8 9.21 3,523 232.6 6.60 3,007 250.8 8.34 2,748 241.3 8.78 2,354 196.7 8.36 1,556 87.7 5.64 1,583 124.7 7.88 1,590 152.0 9.56 1,498 149.6 9.99 114 8.1 7.11 144 12.2 8.47 216 20.2 9.35 245 27.0 11.02 66 5.0 7.65 90 9.3 10.39 521 82.5 15.85 463 68.2 14.74 117 7.1 6.08 87 6.5 7.43 100 8.6 8.58 88 7.0 8.00 217 10.5 4.84 204 9.9 4.84 194 10.3 5.31 173 10.1 5.83 2,070 118.4 5.72 2,108 162.6 7.72 2,621 273.6 10.44 2,467 261.9 10.61 13,854 728.0 5.26 10,131 756.6 7.47 8,947 838.3 9.37 6,953 663.8 9.55 819 775 743 599 (67) (64) (56) (52) 359 269 198 170 52 61 33 70 485 402 368 349 $15,502 $11,574 $10,233 $ 8,089 $ 2,154 68.0 3.16 $ 1,819 94.9 5.22 $ 1,370 96.8 7.05 $ 951 74.3 7.81 162 6.3 3.86 307 18.5 6.00 347 28.1 8.10 356 31.8 8.94 3,955 174.6 4.42 2,648 173.4 6.55 2,223 189.3 8.52 1,096 104.5 9.53 6,271 248.9 3.97 4,774 286.8 6.01 3,940 314.2 7.97 2,403 210.6 8.76 919 30.8 3.35 837 45.9 5.48 828 65.6 7.93 377 33.9 8.99 3,290 112.4 3.42 1,766 89.8 5.08 1,703 128.4 7.54 1,733 147.9 8.53 194 8.3 4.27 156 8.3 5.29 125 9.1 7.28 135 11.8 8.76 389 18.4 4.74 234 20.3 8.69 200 19.4 9.72 178 17.1 9.62 146 13.3 9.10 146 13.2 9.04 114 10.0 8.70 117 10.0 8.59 11,209 432.1 3.85 7,913 464.3 5.87 6,910 546.7 7.91 4,943 431.3 8.73 2,952 2,460 2,301 2,218 52 61 33 71 402 367 342 302 887 773 647 555 $15,502 $11,574 $10,233 $ 8,089 $295.9 $292.3 $291.6 $232.5 1.41% 1.60% 1.46% .82% 2.14% 2.89% 3.26% 3.34%
EX-21 15 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF STATE STREET BOSTON CORPORATION The following table sets forth the name of each subsidiary and the state or other jurisdiction of its organization. Certain subsidiaries of State Street have been omitted in accordance with SEC rules because, when considered in the aggregate, they did not constitute a "significant subsidiary" of State Street at December 31, 1993.
STATE OR JURISDICTION NAME OF ORGANIZATION - ---- --------------------- State Street Bank and Trust Company Massachusetts State Street Bank and Trust Company, N.A. National Banking Act State Street Bank and Trust Company of California, N.A. National Banking Act State Street Bank and Trust Company of Connecticut, N.A. National Banking Act State Street Bank and Trust Company of Maryland, N.A. National Banking Act State Street Bank and Trust Company of New Hampshire, N.A. National Banking Act State Street Boston Capital Corporation Massachusetts State Street Boston Leasing Company, Inc. Massachusetts State Street California, Inc. Massachusetts SPLS, Inc. Massachusetts State Street Brokerage Services, Inc. Massachusetts State Street Massachusetts Securities Corporation Massachusetts State Street Bank International Federal Reserve Act State Street GmbH Germany State Street International Holdings Federal Reserve Act State Street Australia Limited New South Wales State Street Finance Limited New South Wales State Street New Zealand Limited New Zealand State Street Bank Luxembourg, S.A. Luxembourg State Street Banque S.A. France State Street Canada, Inc. Canada State Street Cayman Trust Company, Limited British West Indies State Street Curacao Trust Company N.V. Netherlands Antilles State Street Trust and Banking Company Limited Japan State Street London Limited United Kingdom Wendover Funding, Inc. North Carolina State Street Boston Credit Company, Inc. Massachusetts State Street South Corporation Massachusetts SSB Investments, Inc. Massachusetts SSB Realty, Inc. Massachusetts Two Heritage Drive Realty Associates Massachusetts Three Heritage Drive Associates Massachusetts State Street Florida, Inc. Florida State Street Global Advisors, Inc. Delaware State Street Global Advisors, United Kingdom, Limited United Kingdom State Street Global Advisors, Australia, Limited New South Wales Boston Financial Data Services, Inc. (50% owned) Massachusetts
All of the above wholly-owned subsidiaries are included in the consolidated financial statements for State Street, which are reported on by Ernst & Young, independent auditors, and filed with this Form 10-K. EX-23 16 CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23.1 CONSENTS OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of State Street Boston Corporation of our report dated January 13, 1994 included in the 1993 Annual Report to Shareholders of State Street Boston Corporation. We also consent to the incorporation by reference in Registration Statements (Forms S-8 Nos. 33-38672, 33-38671, 33-2882, 2-93157, 2-88641 and 2-68698) and in Post-Effective Amendment No. 2 to Registration Statement (Form S-8 No. 2-68696) pertaining to various stock option and performance share plans, and in the Registration Statement (Form S-3 No. 33-49885) pertaining to the registration of debt securities of State Street Boston Corporation of our report dated January 13, 1994, with respect to the consolidated financial statements of State Street Boston Corporation incorporated herein by reference in this Annual Report (Form 10-K) for the year ended December 31, 1993. ERNST & YOUNG Boston, Massachusetts -----END PRIVACY-ENHANCED MESSAGE-----