ML20238F651
| ML20238F651 | |
| Person / Time | |
|---|---|
| Site: | Beaver Valley |
| Issue date: | 12/31/1986 |
| From: | Edgerly W, Madden P STATE OF THE ART SEMINARS |
| To: | |
| Shared Package | |
| ML20238F529 | List: |
| References | |
| NUDOCS 8709160259 | |
| Download: ML20238F651 (90) | |
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Ifighlights of Our 194th Year (Dollus in thouunds, except per shue data) 1986 - . . . - - . 1985 _ _ Change Earnings Per Shue i Primuy . . . . . . . . .... ..... .. $ 1.97 $ 1.60 Excluding gain on leveraged leases in 1986. . .... .... ... l.87 1.60 17 % Fully diluted . . . . . . .. ...... . 1.84 1.45 Excluding gain on leveraged leases in 1986. . . . . . . . . . . . . . . . . 1.75 1.45 21 Dividends Per $ hare Cash dividends dedued. . . ... . .36 .30 20 Income Net income . . . . . . . . . . . . . . . . . . . . 71,395 55,254 Excluding gain on leveraged l leases in 1986. . . . . . . . . . . .... 67,823 55,254 23
, Return on Equity Excluding gain on leveraged leases in 1986. . . . . . ..... .... 19.0 % 18.8 % l l
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l l To our Stockholders l l We are pleased to report that 1987, dimensions of the intermediation process. Funds to was another excellent year for State Sneet.The 6 nance New England companies' growth can come highlights on page one summarize our 6nancial from anywhere in the world. U.S. pension funds progress. Excluding non-recurring items, carnings have increased their overseas investments from ) 1 per share have grown at an annual compourj rate viaually nothing 6ve years ago to more than 510 1 of 19% over the last five years and were 21% higher billion in 1986. Money managers in 6nancial centers for 1986 han for 1985. Return on stockholders
- such as Tokyo, London, and Zurich are turning I equity was 19% increningly to investments outside their own The dividend rate at year-end was 25% domestic markets.
higher than a year ago reflecting two increases Statc Street's opportunities in this during 1986. Our fourth two-for one stock split in emerging marketplace continue to expand. Our the past 6ve years was distributed in August. roles are t wofold. We provide to investors services The emergence of a worldwide finan- such as ncurities custody, recordkeeping. *a i cial marketplace is a development of considerable investment management.We invest in financial i importance to State Street As financial assets asses and provide related services. Both functions of people and institutions all over the world ger.e. ate interest and fee inmme and contribute to bnome more signi6 cant, there is a strong trend steady growth of our earnings. In both roles, we toward professional management and care of those are contributors to the emergence of a worldwide i assets. Financial markets throughout the world 6nancial marketplace and the benenciaries are linked by information technology. Hundreds of its expansion. of trading rooms communicate with dozens of During 1986, total assets under our market floors to (crm a worldwide marketplace. custody surpassed 5440 billion, strengthening our Users of capital are put in touch with suppliers of position as one of the world's largest securities capital with increasing disregard for where custodians. In inutual fund and master trust l either is located, services, we have established strong leadership Snuritization, underwriting, and positions, and we anticipate continued success in 1 distnbution are transcending the previously local providing services to the growing mutual fund and
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l l l l l I 1 l l pension industries. Our corporate trust business further some of the businesses in which our j i is benc6tting from the rapid development of strategy far growth is producing successful results. ' snuritization. For example, we sere selected u State Street's participation in the broad trustee and custodian for the collateralized development of a worldwide 6nancial marketplace mortgage obhgations issued by a major investment o6ers long term opportunities to serve a growing ' banking 6rm, and as trustee for the securitization number of customers and to create value for our j of $4 billion of GM AC automebile loans, the stockholders. largest private debt o6ering in U.S. history. More recently, another lary,e investment banking 6rm selected State Street as trustee for its REMICs, the new realestate mortgage investment conduits. We provide custody, investment management, and participant recordkeeping services William S. Edgerly Chairman for the increasingly popolar de6ned contribution plans such as 401(k) plans. To help our corpcrate custorners develop sophisticated, creative solutions 7 to their 6nancing needs, se continue to expand our corporate 6 nance capabilities. In connection with [ Peter E. Madden our securities processing businesses, we increased President our foreign exchange trading during the year to accommodate our customers' international activities. In the following pages, we describe s, _ _ _ _ _ _ _ , _ _ _ _ _ _ _ _ - - - - - - _ - - - - ^ -
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p Serving a Crowi"6 Number of Customers Worldwide l 1 fund industry has experienced . I remarkable expansion, and its 7,rowth has xcelerated in recent years. By year.end 1986, industry assets totaled $716 billion. State Street's growth in mutual fund custody services, at 36% in 1985 l State Street serves and 43% in 1986, reflects the l a growing number of customcrs industry's rapid growth. On worldwide by emphasizing December 31,1986, we had over ) quality. We place a high priority $286 billion in mutual fund assets on innovation. In each of our in our custody, businesses, we aim to be a As the industry has recognized leader in the grown,it has responded to the i reliability ...d value of our changing needs of investors by services. developing a broad array of funds with a variety of investment i Tith 40% of the objectives. Product .mes have U.S. mutual fund industry's expanded and now include l assets under custody, State Street money muket funds, municipal I is the nation's lugest supplier of bond funds, stock and bond custody services to this dynamic funds, and Ginnie Mae funds, industry. At year <nd 1986, the as well as investment products l number of mutual funds serviced such as futures and options. by State Street equaled 46% of the industry's total funds. l Since 1924, when the l l first mutual fund chose State Street to provide fund accounting ! and recordkeeping, the mutual h:r
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i i in addition, mutual fur ds are success in market:ng mutual funds enables us to meet the industry's ) increasingly being used as to their customers, expanding needs. During 1986, i investment vehicles for retire. We attract and retain enhancements to Horizon l
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ment plans such as the IRA and mutual fund customers because included the automation of I Keogh plans and : ' variable life of our high level of customer complicated payment processing insurance products. During the service, a broad range of products, for Ginnie Mae securities and past year, significant growth and a continuing partnership with municipal bond funds, and a occurred in international mutual our customers to develop new remote report writer and data l funds, and State Street's global products. Custody services include retrieval module that enables our j custody service is a valuable l portfolio accounting, general mutual fund customers to j addition to our services for these ledger accounting, and securities retrieve data from State Street's j funds. custody. We have developed an 6tes to generate a variety of Stat. Street provides innovative accounting system, customized reports. services to participants in all called Horizon,"' with a modular We expect to con-segments of the industry. In structure whose Aexibility cinue to take advantage of the addition to independent invest. opportunities created by the ment companies, the industry . 3,,o growth in the mutual fund includes broker / dealers, insuranee industry. In addition, we are companies, and banks collaborat- currently adapting our mutual ing with rund distributors, all of fund custody services to meet whom have achieved excellent the insurance industry's record-x keeping and reporting needs for their general account assets.Te believe our expansion into this market offers signi6 cant oppor-tunities for future growth. si cou o v, Sute Semt's Grosth in Mutual Fund Aucts Under CustoJv ( B,ti.. .n, ,,e J,.'J s 5n lllM" nji i '
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l i i l Building on our extends our master trust services capabilities as a custodian for the to cover all of the world's maior mutual fund industry, State Street financial markets.We providt our has become a leading supplier customers with comprehensive ,
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and benefit plan services to for their international investments.
/ of the mutual institutional invettors. During Large corporate fundindustry's assets 1986, we were ranked the nation's peraion plans are a major part of in our carr, State Street largest master trust custodian the market for these services. l is the nation's fargest bank. At year end, domestic Public pension funds are a supplier of custody ,
assets for which we act as master ranidly growing segment of the services to this trustee or master custodian for pension market, and we have , dynemic industry. U.S. pension plans totaled adapted our capabilities to the In 1986, State Street
$99 billion. special requirements of these ,
tres also ranked as the As master trustee, plans. State Street's custody nation's leading master State Street provides securities services are also widely used by em:t custodian bank. safekeeping, income collection, endowment funds. Our approach trade settlement, cash manage- to the market is client driven. ment, and timely reporting of By developing expertise in the portfolio information worldwide, special requirements of each Related services include perfor- market segment, our teams of mance measurement, portfolio professionals provide services , I analysis, oroline access to port- tailored to our clients' needs. l folio information, and securities Icnding. Plan sponsors continue to seek broader diversifi- I 1 cation through increased interna-tional investments. Our global custody wrvice, begun in 1981,
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1 State Street's services segment of the market or, in the ninth largest bank money for de6ned contribution plans, some cases, outperform market manager in the United States. such as 401(k) plans, include averages. These products are State Street has employee recordkeeping, invest. becoming increasingly popular, as developed a variety of investment ment management, portfolio managers of large pension funds prodacts for institutional inves-accounting, and bene 6: payments. seek reliable investmeni results tors who seek diversi6 cation j We provide these services to a for sizeable portfolios. Our through international investments, growing list of Fortune 500 closed end real estate funds enable including the 6rst ERISA approvrJ companies. During the year, our pension fund managers to commingled international index Selection Fund, an innovative diversify their portfolios and fund, country selection funds, and approach to pooled guaranteed capitalize on specialized real our High Wlue Fund, which takes insurance contracts (GICs), more estate investment management. a more active approach to stock than doubled in size.This fund At year end 1986, State Street had selection. During 1986, we created otters our clients safety and $24 billion of institutional assets a global index fund for the flexibility at higher rates than under management.We are ranked overseas subsidiary pension plans traditional approaches. of a maior U.S. corporation. Te im are currently the largest manager State Street's of international indexed assets in extensive experience in providing y the United States. custody services led us to develop investment management The international products designed for institu- " expansion of our securities tional investors. We focus on custody and recordkeeping quantitative inve stment products, services extends our proven with special emphasis on index expertise to non U.S. customers. funds designed to replicate a . State Street has provided custody
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We have identi6ed strong growth State Street offers opportunities for our global lending and other 6nancial custody services in the interna- services to middle market tional pension fund market, companies. The New England especially Australia, the United region's expanding economy Bour strength uilding on Kingdom, and Canada. Signi6 cant provides a strong base for our growth and change in these mar- services. Our head office banking as the nation's leading kets base prompted pension plan approach distinguishes us from master trust and sponsors to disersify by hiring other banks that address this mutualfand custodian, multiple investment managers and market through subsidiaries or . State Street is investit g signi6 cant portions of loan production offices. State expanding custody , their assets in foreign markets. Street's corporate customers services worldwide. During 1986, we work directly with highly trained, internationalassets expanded our operation in knowledgeable banking officers under our custody London to serve an increasing who have ready access to top totaled $20 billion at number of European customers. management and product special-year <nd, nearly a Our office in Sydney, opened ists. A steadily growing number thrrefoldincrease in late 1985, provides custody of well managed companies are ever 1981. and recordkeeping services for choosing State Street as their our growing list of customers primary bank. in Australia and Asia in addition, State Street's credit we installed our new intercon- servius include unsecured tinental telecommunications facilities, asset based finance, and system that links State Street's leasing. Our real estate 6nancing offices worldwide. At year-end services are directed toward 1986 international assets under premier real estate developers. our sustody, including US assets Te also orTer cash management for non U.S. customers, totaled services, as well as insestment 120 billion, nearly a threefold l irwrease over December 31,1985.
managemer.. for both corporate international financial markets, funds and employee benefit plans. and State Street continues to Our international expand its activities in this area. trade services support the import Our money market operations and export activities of our complement our credit services t State Street, corporate customers. For by providing funding sources a headofice importers, we provide letter of that match the varied pricing banking means gaslity. credit and other documentary structures of commercial !cnding tending oficm, teho services that assure efficient and State Street's funding activities haw ready accru to reliable payment for goods. For include the ase of interest rate top management and exporters,in addition to offering swaps and financial futures in highly trainedproduct documentary services, we proside combination with conventional y kidias, sern our trade finance services to assist in funding methods. In addition, we custamm direcdy. managing the risk of selling offer to our corporate customers abroad while arranging terms a variety of short and medium-that are competitive in the world term investment vehicles, marketplace. In addition to including certificates of deposit, supporting the trade finance repurchase agreements, insured needs of our domestic corporate money market accounts, bankers customers, State Street Asia acceptances. and municipal and I.imited, our Hong Kong subsid- government securities. During iary, and State Street Bank 1986, we expanded our municipal (Switzerland) are adding an bond underwriting activities and increasing number of overseas broadened our customer base for companies to our sorporate distribution of these tax-exempt customer list. securities by over 50% State Street's foreign Capital markets exchange trading attively supports activities te at the tenter of the growth and developmera of 1
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I I i our global custody clients and the to take advantage of those international! trade activities of opportunities. our corporate customers. Our London Branch and State Street StateStreet Bank (Switzerland) are active expanded its activities in other , Rreent intermediaries with both U.S. businesses during 1986. We dewlopments and non-U.S. corporate customers strengthened our reputation as in securitization offer that operate in Europe and require a leading trustee and money growth opportunities (creign exchange, deposit, and manager for personal wealth. for State Street. In lending facilities.The issuance of In addition to our traditional 1986. State Street tv.ts Eurodollar certificates of deposit personal trust business, we have seleard as trusterfor through our London Brac h had significant success in
$4 bdlion in securities provides expanded investment providing money rnanagement collateralized by alternatives to many of our services to professionals and GsfAC automobile corporate customers. entrepreneurs, and to trusts and loans. the largest State Street's foundations.We plan to continue private debt offering corporate finance services are our growth in these areas.
in U.S. bistory provided throui;h State Street More than 50.000 Boston Capital Corporation. new credit card accounts were These services include private added duri9g the year, and 1 placement of Jcbt. acquisitions cardholder loans increased by i and divestitures, and project 60% Our card services are finante. Te also provide loan marketed to creditworth< New syndication scruces to our corpo. England consumers. During 19%, rate customcrs. As Jeregulatiun we added a number of atiinity l creates new opportunities for group card prograrns, w hich ar cammercial banks to proside insestment banking services, State Street wdl be well positioned
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l i aimed at people affiliated with were selected as trustee for l universities and other the securitization of $4 billion ' organizations. of GMAC automobile loans, We completed the the largest private debt offering consolidation of our branch in U.S. history. We beliese banking system into six offices. securitization will continue to We played a key role in the offer substantial opportunities for formation of a New England. Star.e Street. wide cash machine network, which will give Scare Street State Street combines customers access to more than information technology with ( 1,800 Yankee 24, machines in all banking to serve a growing l six New England states. number of customers worldwide. The expansion of We aim to strengthen further our our corporate trast business is leadership positions in our benefitting from the trend toward existing businesses, and we see securitization of debt. Building cxcellent growth opportunities in on our experience as borid trustee the rapidly descloping worldwide and sophisticated recordkeeper, financial marketplace. we are providing trustee services for collateralized mortgage obligations and automobile loan bond isses. During 1%, we r +m, I*
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t Financial Hisiorv i State Strert Baste a Corporation a nd Subsidurses Compound Growth Rate (Dollars in millions, except per share data) 1986'" 1985 19843 1983'" 1982"> 1981 81-86*' Condensed Income Statements Net interest income, taxable equivalent $ 212.1 $ 185.1 5152.6 5150.2 $141.2 $ 116.8 13 % Taxable equivalent adjustment . 31.1 29.5 24.9 19.5 18.1 17.4 la Provision for loan losses . . 17.9 12.5 4.0 4.7 8.5 5.0 29 Other cperating income . . . .. . 248.0 177.7 143.1 115.6 112.1 65.2 31 Other aperating expenses . 301.0 232.2 189.9 176.3 152.5 122.9 20 locome tazes. .. 38.7 33.3 27.9 26.8 25.3 10.5 30 Net income. . . . 5 71.4 $ 55.3 $ 49.0 $ 38.5 5 48.9 5 26.2 22 Per Sharea ' Earnings: Primary . . . . . . . .. $ 1.97 $ 1.60 $ 1.42 5 1.11 5 1.47 5 .78 19 Fully diluted . . 1.84 1.45 1.29 1.05 1.39 .72 19 Cash dividends declared .. .36 .30 .25 .23 .20 .17 17 Book value at year end . 11.19 9.48 8.10 6.96 6.09 4.90 18 Closing price . , 23.38 20.63 11.50 7.25 6.91 3.86 43 Average Balances Interest-earning assets . .. 54,967 53.957 $3.078 $ 3,147 $2,717 $2,352 16 Loans, net of unearned income 1,938 1,660 1,332 1,279 1,207 1,144 j 11 Total assets . . 6,288 4,935 3,902 3,938 3,535 3.058 16 Noninterest-bearing deposits . 2,241 1,550 1,184 1,176 1.056 979 18 Long. term debt . . 81 79 82 69 65 69 3 Stockho!ders' equity . . 358 293 251 224 "'9 153 19 Ratios'" Return on average equity . 19.0 % 18.8 % 18.3 % 18.3 % 19.4 % 17.2 % Return on average assets . . 1.08 1.12 1.18 1.04 .98 .86 Internal capital generation rate. . 15.5 15 5 15.0 14.8 15.6 13.6 Primary capital ratio (average) . 6.3 6.6 7.1 6.4 5.7 5.7 Net charge.ofis to average loans. . .64 .34 .25 .12 .29 .33 i I Allowance for loan losses to ending loans.. 1.95 1.78 1.76 2.11 2.09 { 1.90 ' filEutudmg the um on Imrnnt leases, tasaide muutJent net mienst imome u 1211.s64.000. ne mcome u ts%8D.000, ummgs per her
.urr II 84 andf ully ddated ramano per kre avr ll./S (2) Endedmg ihr um on du,mnarum ofopuon set uncome u $41.869.000, earnmgs per her arr $LJJ, andfully ddated ummy pr kre er $121.
Il/ Euladmg ik lou on the sale of subudurses, net mcome u $40.972..W. earnmgs per Jurr avr 5tl9, andfully ddated ummgs per kre l are Illt.
/*/ Exdadmg tk pm on tk sale af oral esure upoon net mcome o 1I4 MC.lDO, earrtarugs per sharr er $t04, asedfully dduted earnmgs per sorr avr 8.M l11Ranon and comprendgmteth r.uta etdmie mm m urvmg utems. Imledmg :Ime trems, verum em muury n 2:0% 11s% 172'% .md 214% .md I return on auern us 1.14% i2s% n't. and LJn, lor Ivner 14.14. Ivx1 and 19W2. mpertswly.
l fs/lts her .emoamts four 19R1 ru l4Ms han Inrrn restatal to orfla t tuvo fur une sonk > plan anteheed un lYM2.1983,1981 arsd 19M6. I i l f . .:t t I I ____-____-A
4 6 Enansial Resiew
. 22 This ><ction provides mformation about the operating results and 6nancial condition of State Street Boston Corporation for the tnree > cars ended December 31,1986.This section should be read in conjunction sith the consolidated 6nancial statemer r,6nantial history, and supplen. ental 6nansial dat.).
.iw Summary In 1986, fully diluted earnings per share were $1.84. TN se rewits in-cluded $,09 per share from a non. recurring gain from accounting for lescraged leases brought about by the Tax Reforrn Act of 1986. Excluding this gain, earnings per
.. . , , , share were $1.75, an increase of 21% from 1985, net income of $67.8 million was up j 23%, and return on stodholders' equity was 19.0%. This is the 6fth year in a rov
/ that State Street's return on equity exceeded 18%.
Improvement in earnings per share resulted f rom a 40% increase in other operating income and, excluding the non. recurring gain, a 17% increase in X taxable equivalent net interest income, partially odset by increased expenses and a higher provision for loan losses. State Street's revenue is reported in t wo maior categories-other operating income and net interest income. In 1986, other operating income, or fee
! "g , income, continued to account for an increasing percentage of taxable equivalent y ,, y j n , " income before operating expenses, reaching 56%.
For 1986, earnings of $1.75 represent a 19% annual growth rate since Earnings Per share 1981, when earnings per share were $.72. This growth reflected a 31% annual growth istis suomn in other operating income and a 13% annual growth in taxable equivalent net (t hdid interest income.
- 6 arnenp Per %e ialuJmg s.a ka venm ium Other Operating Income in 1986, the growth rate in other operating income accelerated to 40%
from 29% in 1985. Other operating income increased $70.3 million to $248.0 million. The growth in 1986 resulted primarily from the rapid growth in fiduciary 2% compensation and also from increased foreign exchange trading income. The following table shows the components of other operating income. Non.recurrmg gains are in .luded on a separate line in the table. 5 Other Operatin - come Compound Grom th Change Race g (lkllars m milhons) 1986 1985 1984 1983 1982 85-86 j 1981 31-86 hJussary
,ompenwoon. $176.6 51214 5%9 5 79.7 5 60.1 539 8 44 % 35%
I 100 Bank sard tm . I oreign exchange trading . 23.7 t 4.3 20 5 57 16 6 13 7 99 8.1 16 24 2.2 1.5 0.5 16 151 55 Servicetees. 99 82 93 74 I correspondent 12.1 4.5 22 10
.. _ ~ no servise tm . 8.5 83 90 '3 8.5 71 2 4 Trading gains
. 1I (loseL net. 1.5 14 C 3) 13 CJ 11 Munties guns L. : slowL net. 0.7 37 2i (1 I) f 3 2) 13 9) si s2 o .4 o Other . 10.6 48 50 57 54 5.J 248.0 177.7 137.7 lis6 +]. ' $52 40 31 Other Operating Immm'
%n. ret urr ng ,
d usud.ng % kn .rm lums) m,ite ..nm.it N gains 54 21 4 ] 1 e F,Jmun umprnen l'otJI dher i operaung income . $248.0 $177.7 5143.1 5115 6 5112.1 5652 40 11
/... .n 4
l
Financial Review Fiduciary compensation, increased 44% to $176.6 stlion in 1986. < The major services contributing to 6duciary compensation w, . securities custody and recordkeeping for mutual funds; master trust services for asion plans, endowments, and foundations; global custody; personal trust cvices; investment management for employee benc6: plans; the administration t retirement plans; and services for de6ned contribution plans. The increase in fiduciary compensation included growth in all product areas and was primarily attributable to new business and the growth of existing clients' assets. Fiduciary compensation reflects revenue based on the volume of assets under custody or management, portfolio activity, and other services. In addition to fees, certain services have associated demand deposits. These deposits are invested, and the resulting income appears on the income statement as interest income.The following tab!c shows the growth in assets under custody and assets under management: Assets Under Custody and Management Cornpound Growth Change Rate 1986 1985 1984 1983 1982 1981 85-86 81-86 ( Assets in_ billions)_ _ . . . _ _ . . _ _ _ . _ . . . _ . . Total assets under custody . . . . . . . . $440.8 $326.2 5245.1 $178.8 $151.5 5110.4 35% 32% Mutual funds . 286.3 199 8 146.7 110.3 108.2 83.0 43 28 Master trust, domestic . . 99.1 80.6 55.0 43.8 33.9 20.7 23 37 International
- 19.9 6.8 40 3.3 1.5 .9 193 86 Total assets under managemem. . . 26.1 15.3 11.7 9.7 8.5 5.1 71 39 Institutional . 23.5 13.1 9.8 7.9 7.0 3.8 79 44 Per w al. 2.6 2.2 1.9 1.8 1.5 1.3 18 15
% dada murutwn.J mem.dfa,nd. men.
Growth in assets under custody was the primary reason for the increase in fiduciary compensation. At year.end, total assets under custody were $441 billion, up 35% from 5326 billion at year.end 1985. Mutual fund assets increased 43% following a 36% increase in 1985, reflecting the accelerating growth of the mutual fund industry. Assets of nearly all types of mutual funds soared. Bond and income funds grew dramatically, particularly U.S. government income, Ginnie Mae, long-term municipal bond and corporate bond funds. Equity, short term municipal bond and money market f unds also increased. State Street's mnket share of the U.S. mutual fund industry, measured by assets under custody, is 40%. During 1986, State Street added 160 new funds for current and new clients, bringing the total funds serviced to 851,46% of U.S. mutual funds. Domestic master trust assets under custody increased 23% to $99 billion, primarily because of asset growth and additional portfobos from clients. State Street ranks as the nation's largest master trust custodian brnk and has approximately 6% of the U.S. market. n ur ing 1986, the global custody business grew substantially. New clients around the world were serviced from expanded facilities m Quincy (Massachusetts). London a 1 Sydney. International assets under custody near'y tripled, reach.ng 520 billion. This number includes por(folios of non.U.S. customers, and the international portfolios of U.S. pension plans and mutual funds.
/. .n t 2..
Financial Review - I The growth in 6duciary compensation also reflects rapid growth in { assets managed. During 1986, institutional assets managed increased to 523 5 billion, up 79%, due to new business, use of additional products and funding by existing clients, and asset appreciation. Growth was particularly notable in passive equity products, with substantial growth also in passive international equities, passive 6xed income, and short. term investment funds. Personal trust services continue to be an i important and growing source of 6duciary income. During 1986, new business and asset appreciation contributed to the growth. Rapid grosth in services for dc6ned contribution plans, particularly 401(k) plans, contributed to the increase in 6duciary compensation. Income continued to grow from the administration of retirement plans, primarily IRAs and Keogh plans. Foreign exchange trading income was $14.1 million, up 58.6 million, or 151%, from 1985 Jue to an increased customer base combined with increased participation in an active market. Bank card fees include annual membership fees, transaction fees and merchant discounts earned or rredit and debit cards. In 1986, bank card fees grew 16% to 523.7 rnillion due to in(reased credit card usage and an 18% increase in the number of credit card accounts. The 52.2 million, or 22%, increase in service fees resulted primarily from additional commercial loan fees. State Street places emphasis on the fee component of its compensation for commercial lending services.
- - 2* Net Interest income Net interest income is the amount by which income generated by earning assets (loans, investrnent securities, and money market assets) exceeds the interest cost of deposits and funds purchased. The presentation of net interest
, . . .. income is on a " taxable equivalent" basis to adjust for the tax-exempt status of income earned on certain investments and loans. In 1986, taxable equivalent net interest income was reduced by $3.6 million from an adjustment for leveraged leases brought about hy the Tax Reform Act of 1986.This was more than o6 set by the reduction n taxes. The remainder of this discussion excludes this non. recurring item uo from taxable equivalent net interest income, yields, and margin.
in 1986, taxable equivalent net interest income was $215.7 milhon, j up 17% from 1985. The improvement resulted primarily from increased i nonirterest. bearing deposits,largely from activity and growth of securities processing businesses. Interest earning assets increased 26%, including a 17% increase in loans. This growth was funded by a 40% increase in nonintereobearing funds .nd by a l 19% increase in interest hearmg liabilities.The benefits of blance sheet growth were l partially o6 set by the edect of lower interest rates. Shori.rerm interest rates averaged ! approximately 1.5 percentage points lower in 1986 than in 1985. o y eo o c ,, Taxable Equivalent Net Interest income Compound Net Interest ina" Change ae i ,,[$$i (Dollars in mdlium) 1986 1985 1984 1983 1992 1981 85-86 81-86 Interest irwome - 1393.5 5%71 5337 4 5326 8 5351 6 53 % 5 Tuable equivalent adiustment . 33.5 29 5 24.9 19 5 18.1 17 4 427.0 %6 M2.7 346.3 371.7 3539 Interest expenw . 24 f.2 211.5 210.1 196.1 2315 237.1 Net interest in6omenazabk equivalent basis . 5215.7 5185 1 5152.6 ilSM $141.2 5116.8 17% 13 % t , , n , a... , l
- t.
- Financial Review I
, i Eerni eg Assets. The components of earning assets are shoun in the following table:
Average Volume Average Rate (D..ollars_in millions). . - - . . . 1986 1985 1984 1986 1985 1984
- - - - .. ~
Interesthearing depouts with banks . . . . $ 859 $ 803 $ 725 7.56% 9.47% 11.X)% Federal funds sold and securities purthased under resale agreements . . 604 392 223 6.80 8.16 9.94 investment securities: U.S. Treasury and Federal agencies . IA4 745 522 9.01 10.55 11.05 Staic and municipal. . 311 2% 197 10.24 10.44 11.13 Other investments . . . 186 48 43 7.63 11.21 12.81 Toulinvestrnent iecurisics. 1,501 1.029 762 9.16 10.55 11.09 Trading account assets . 63 73 % 7.27 8.22 9.96 1mns, net of unearned income: Commercial and financial . 1,071 1,030 877 8.13 10.03 12.42
' Real estate construction . 192 126 85 9.30 10.64 12.57 t
Psal estate mortgase. . . 80 67 51 9.67 11.04 13.49 Consumer . . . 3% 2% 191 12.76 13.28 14.44 Foreign . . 170 1% 79 7.55 8.24 11.79 j , leases. 89 65 49 8.89 10.48 12.33 l Totalloans., . . .
. _ .1,938 1.660 1,332 9.09 10.48 12.76 Total interesi<arning assets . . 64, % 7 53,957 13.078 8.59 10.02 11.79 Average loans increased 17% to $1.9 billion. Commercizi and financial loans, which comprised 55% of the loan portfolio in 1986, grew 4% An increase in loans to middle market companies was partially offset by a decline in less profitable l
loans to large national companies. The consumer loan portfolio grew 42% to $336 million primarily as a res alt of the credit card expansion program begun in May, 1985. Under this program, the number of credit card accounts increased 30% to over 300,000 accounts. In 1986, real estate construction loans increased $66 million to
$192 million. The increase in foreign loans of $34 million, or 25%, results from the inclusion of the loans of State Street Bank (Switzerland) for a full year.
As sources of funds increased, an additional $472 million was invested I in securities. $259 million was placed in U.S. Treasury securities. Additional State and municipal securities were purchased at the end of 1985 in anticipation of a Federal tax 1.w change. During 1986, $138 million of other investment securities were added to the portfolio, including mortgage. backed securities, rloating rate notes of corporations and bank holding comparies, and Euronotes and corporate bonds with short maturities. i The Corporation invested a portion of its rapidly Browing l nonimerest. bearing deposits overnight in Federal funds sold, which increased Federal funds sold and securities purchased under resale agreements by $214 million l to $606 million.
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l 1 Financist Review ! 1 l l funding Sources. During 1986, there was a shift in the funding rrix toward l lower-priced funds. as shown belc>w: Average Wlume Average Rate (Dollars in millions) 1986 1935 1984 1986 1985 1984 Interestbraring depos ts: Savings and NOW. . . . . 5 163 5 157 5 119 5.52 % 5.89 % 6.33% Insured money market accounts. 516 357 228 5.94 7.29 9.05 Certifwares of $100.000 or more. 436 529 580 7JI 8.31 10.33 Other time. 36 33 26 6.68 7.99 10.21 Foreign . . . ..... . 597 535 333 7.25 8.56 10.82
)
Federal funds punhasci . . . . . . 472 277 234 6.45 7.94 10.24 i Securities sold under repurchase agreements 934 695 500 6.13 7.44 9.48 l Detx (short and longerm). 131 125 133 7.83 8.32 8.98 j Total interesthearing liabilities . 3.225 2.708 ~53 2 6.55 7.81 9.76 I Noninterestbearing sourca . 1,742 1,249 925 ' Tntal sources . 54,% 7 53.957 53.078 4.25 5.34 6.83 Nonint rest-bearing sources of funds grew at an accelerated rate, j increasing 40% from 1985. This was due primarily to a 45% increase in noninterest. i bearing deposits, based to a great extent on activity and growth in the securities processing businesses. Stockholders' equity grew 22%, primarily from the retention of earnings and also from the conversion of debentures. I interest. bearing liabilities increased 19% Securities sold under ' repurchase agreements were up $239 million, or 34%,in conjunction with the expansion of the U.S. Treasury securities portfolio. Insured money market accounts were up 5159 million, or 45%, reflecting additional deposits from personal trust 3 clients, governrnents, corporations, and law 6rms holding deposits on behalf of ( l their clients. Correspondent banks sold us additional Federal funds, increasing l Federal funds purchased by 3135 million. The Corporation reduced its use of large l j certi6 cates of deposit by 193 million. ' l Net Interest M.srgin. Net interest margin, de6ned as taxable equivalent net interest income divided by average interest earning assets, declined to 4.34% in 1986 from 4.68% in 1985 due to lower rnarket interest rates and the resulting lower asset yields. Because 35% of funding for interest. earning assets comes from noninterest. bearing sources, State Street's net interest margin tends to reflect the level of market interest rates.
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Net Interest Margin 1986 1985 1984 1983 1982 1981 ield on mterest.carning aucts. 8.59% 10.C2% '. l .79% 11.01 % 13.68 % 15.05 % Race on employed h.nds. 4.25 5.34 6.83 6.24 8.48 10.08 l Net interest margin. 4.34 % 4.68 % 4.% % 4.77 % 5.20 % 4.97% l
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Financial Review I l I
,, Provision for Loan Losses / Credit Experience i The provision for loan losses charged to income was $17.9 million, up i from $12.5 million in 1985.This increase wu due to a 17% increase in average loans and higher loan charge ods. Net loans chari,ed-od were $12.4 million, up frorn I
$5.6 million in 1985.This was due to an increase in the amcunt of consumer loans W charged o6 from the expanded credit card portfolio, higher commercial loan I charge.o6s, and fewer recoveries.
,(
The al'owance for loan losses increased to $42.4 million, equal to 1.95% of ending loans. Non. accrual loans declined to $9.3 million, or .43% of loans
, , , ,, at year <nd. There were no interest concession loans or other real estate owned on December 31,1986.
Credit Esperience (Dollan in millions) 1986 1985 1984 1983 1982 1981 so Provisioa for loan tosses . .
$ 17.9 $ 12.5 $ 40 $ 4.7 $ 8.5 $ 5.0 j Charge ons. 17.1 12.I 7.2 9.2 11.5 11.7 bcoveries. 4.7 6.5 38 7.6 8.0 8.0
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I-I si s2 al s4 as s6 0 Net loan cimge.ons . Allowarv: for loan loues, year end. Nc.rperformir.g loans. Ratios: l2[4 ~ 42.4 9.3 5.6 36.2 10 6 3.4 27.1 9.9 1.6 26.5 5.4 3.5 27 6 22 6 8.2 3.7 12.6 Net charge ons to average loans, net . .64% .34% 25 % 12 % .29% .33% Alkwance fue LauiIms Allowance to ending loans net. . . . 1.95 1.78 1.76 2.11 2.09 1.90 8 ^S= W"a l= " Non-performing loans to ending lo.ns, net . a rm,=,of cading tai .43 .52 .64 .42 .62 1.06 e w chym. Other Operating Expenses Pme-w>^= ,t" Other operating expenses include all expenses other than interest expense and the provision for loan losses. The following table summarizes the cornponent> of other operating expenset Other Operating Expenses ._ Compound Growth Change Rate (Dollars in millions) 1986 1985 1984 1983 1982 1981 85-86 81-86 Compensation . . .$ 140.6 1113.7 $ 89.4 $ 84.4 $ 76.0 $ 60.1 24 % 19 % Other personnel costs . 20.3 17.5 17.7 16.1 13 9 11.9 16 II Total personnel wsts. 160.9 131.2 107.1 100.5 89.9 72.0 23 17 Occupancy, net . 21.7 15.2 12.7 11.5 li.; 10.5 43 16 Equiprnent . 22.9 18.3 14.8 13.9 13.2 8.5 25 22 External contract wrvices . 18.4 12.4 10.3 8! $9 44 48 33 Postage, stationery and supplies . 11.4 9.5 7.? 80 70 6. 4 20 12 Professional fees . 9.9 72 69 61 47 4. 5 38 l7 Advertmng and customer contact . 7.2 7. 6 5.9 58 46 40 (5) 12 Telewmrnunwauons . 8.5 54 4.5 4.1 35 2.8 57 25 insurance . . 6.8 3.7 2.2 2.3 2.1 1.2 84 41 Lms on sale of subudiaries . l.3 Other . 33.3 21.7 17.8 14 7 10 9 (6 Total other operating expenses . $301.0 $232.2 $ 189.9 $ 176.3 $ 152.5 $ 122.9 3C 20
/ i .ro .
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. l l Financial Rn icw l 1 l 1 l In 1986, other operating expenws were $301.0 million, up 30% from 1985. CompentJtion, the largest category, Was up 34% primarily Js J result of adding 675 stad during 1986 to process increased business. Salary raises, as well as increased use of contract help and overtime, also contributed to the year to year increa c. Other personnel costs, up 16%, refletted the increaw in stad. While one maior component of other personnel costs, medical insurance, increased with the growth , in stad covered, a wcond component, pension expense, declined due to better l investment perform nse relative to actuarial assumptions. In 1987, State Street will j adopt the new regulations of the Financial Accounting Standards Board on pension i accounting whish if applied in 1986 would have caused a reduction in pension l ex pense. I Occupancy expense increased 43% due to the addition of office space j during 1986. This included the acquisition of a 150,000 square. foot building in l Quincy, Massachusetts; the use of an additionai 95,000 square feet in two oth'er 1 buildings in Quincy; the occupancy of an additional IS floors in the headquarters j bu:Iding in Boston; the expansion of facilities in New York, London, Munich, j and Sydney; and the opening of an office in Cahfornia.The cost of bank branches j was lowered with the closing of nine odices. At year-end 1986 State Street had six i brenches in greater Boston. { Equipment expenses increased 25%,in part because of an increased ! number of tomputer terminals and additional mainframe capacity. Expansion of l global custody services accounted in part for the 48% increase in external contract j services and the 57% rise in telecommunications. Professional fees incrmed 38% as j a result of business growth The 84% rise in insurance costs resulted primatily from increases in premium rates The year-to. year increase in "Other" included higher ) operating losses, start up expenses associated with global custody, and the timing of charitable contributions. Income Taxes The income taxes sharged to earnings were $38.7 million in 1986,ot 35% ofincome before taxes. The tax provision of $33.3 million in 1985 represented 38% of income before taxes. The 1986 decrease in the edective rate primarily results from the impact of the Tax Reform Act of 1986 on accounting far leveraged feases.
, Under applicable accounting rules, the rate changes which become edecr:ve in 1987 and 1988 required the Corporation to recalculate its ner investment in its leveraged lease porifolio and recognize the edect in 1986. This resulted in a decrease in loan income of $1.1 rnillion, a reduction in taxes of $4.7 million, and an increase in net I income of $3 o rnillion. On a taxable equivalent basis, loan income decreased $3.6 m million and taxes were reduced by $7.2 million.
Dividends and Common Stock Dividends per share were increased twice in 1986, cont.nuing a practice started in Desember,1978. At the end of 1986, the dividend rate wis 25% higher to than at the end of 1985. For 1986. the Jividend payout ratio was 10%. In setting dividend policy, the Board of Directors seeks both growth in divaends and internal capital generation to support earnings growth. %ns e 1981, cash dividends declared per share have grown at a 17% annual rate. A two-forme stosk spht was distributed on August 5.1986, the
"""""" fourth in five years. At December 31,1986, the Corporation had authoraation to purchase up to I.280,000 additional shares or common stock in the open market Dmena Per h or in praately negotiated transactions. There were 4,439 stockholders of record m,hi at year end.
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{ Financial Review - duo The following table shows dividends and market value per share , for 1985 and 1986:
.. .. no Market Price Dividerxis End of Common Smck (per share) Declared
_ , , , _ ,_ ja _ pid Period
. ao N Firu . . . .. . .. . $.06 511 % $13% $13 Second . ... . . . .. .08 122%: 17 %
.. 16 %
Third . . . . .. 08 14 16' % 15 %.
,,,. ,, ao Fourth . . .. .08 I 4'%. 20 % 20 %
1986 Firn . . . . . . . . . .. . $.08 $ 19'/s. $26% $24 Second . ... .09 22 % 28 % 28 % so Third . . .. . .. . . .09 19 % 28%. 21 % Fourth . . . .10 20 % 23 % 23 % Capital
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""""8' Equity capital grew primarily from the retention of earnings. In 1986, and for the preceding four years, capital was generated internally at a rate exceeding gg. g 14% each year. On December 31,1981, stockholders
- equity was $165 million, as gg shown on the chart. As of December 31,1986, stockholders' equity had increased to c u,5,,,, a uw
$392 million, a 19% annual growth rate. In 1986 stockholders' equity increased $69 million. Of this increase, $8 million came from the conversion of debentures and
$59 million came from the retention cf earnings. The average regulatory ratio of primary capital to asats was 6.3% in 1986, compared to the minimum regulatory requirement of 5.5%.
During the fourth quarter of 1986, State Street issued $75 million of long. term notes, which are included in the Federal regulators
- definition of total capital. On aveage during 1986, the Corporation's total capital ratio was 7.1%.
No one financial ratio or formula satisfactorily measures the ~al level of risk at a bank holding company, nor, by extension, the adequacy of its capital - base. One additional meaningful way to evaluate the adequacy of capital is to rr.asure the ratio of primary capital to risk assets. Among the usets included as risk usets are: loans, municipal investment securities, and other investment securities. The ratio excludes assets with minimal credit risk, such as U.S. Treasury securities, , interest. bearing bank balances, cash and due from banks, Federal funds sold, securities purchased for resale, and trading account assets. As of June 30,1986, State Street's ratio was 13.2%. ranking it above 95% of its peer group of 83 bank holding companies with assets of $3 to $10 billion. Balance Sheet Strength i l Asset composition. The composinon of State Street's balance sheet reduces credit
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risk. On average during 1986,48% of State Street's assets mere invested in money j market assets (investment securities, deposits wgh other banks, and federal funds l so d). Loans were 31% of assets, a relauvely low level. The remaining 21% of assets wcre noninterest. earning, including customers' acceptante liabiW' pre.nises and equipment, and accrued income receivable. Legsodity. Liquidity is the ability to satisfy demands for withdnwats of deposits, lending obhgations, and other Corporate needs. Liquidity is provided from maturmg investments, the large portfolio of marketable investments, payments on loans, and through access to borrowed funds and deposits. Twstvoxhr l u.____--_____.___-__._______m___mm__-___m
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f' Financial Review - 1 i The short maturity structure of State Street's assets enhances liquidity. As of Decernber 31,1986, $2.3 billion, or 74%, of investment securities and money marliet anets had maturities within one year. The loan portfolio had $L3 billicn of loans duc within one year. State Street continued to expand and diversify its funding sources during 19a6. Nonintnest. bearing deposits supported 36% of State Street's total assets, a relatively high percentage. Interest bearing deposits and liabilhics, which increawd 19% in 1986, were held primarily by corporations, institutional investors, banks, and savings and loan associations. Individuals held additional interest bearing depodes in the form of insured money market accounts, savings and NOW accounts, and certificates of deposit. 5 are arid lwal governments and non. pro 6: . organizations provi.!cd additional funding. l Country rid. Country risk arises from borrowers' possible inability to repay j becauw of the irwonvertibility of their assets into dollars. At December 31,1986, aucts with couatry risk included $910 million of Eurodollar placements. $209 millicn of acceptance 6nancing and $96 million ofloans. Eurodollar placements, usually for six months or less, were with foreign branches of large U.S. banks and in 1.trge internatiottal banks in Western Europe. Asia, and Gnada. Acceptance 6nar.cings mere with large international Western European and Asian banks. The Corporation had foreign outsiandings of 1% or more of total assets in Japan, United l Kingdom, Switzerland, Italy, France, Canada, and Germany. Total country risk in Latin America was $14 million, with no more than $4.5 million in any one country. Interest sensttmty n an.:gement. The Corporation manages the structure of j i interest-eat ning assets and interest bearing liabilities to balance the objective of l income growth against the risk of interest rate ductuations. Interest race risk I arisn from a mismatch of repricing timeframes between assets and liabilities. The Corporation moniton the volume, yields, and repricing characteristics of rate sensitive assets and liabilities over various time herirons. Intere>t rate risk is controlled by maintaining a clow match between the volume of assets and liabilities subject to repricing during a given period, and by adjusting to market conditions and changing interest rates. On December 31,1986, interest-earning assets and interest beeing liabilities subject to rate change were as follows: Interest Sensitivity Position at December 31,1986 Interest Sensitivity Pen.od In months (Dollan ir. millions) Balance 0-3 4-6 7-12 over 12 Internt.Earmng Aswti: 1 Loasw $ 1,864 $1.283 $ 36 5 32 $ 5I) 1 investment wcurities . t,622 299 197 329 797 Money market auct>* t 513 t.04 t 272 198 2
'licat internicar ning assets . 4,999 2,623 505 559 1,312 Imernt Branng Liah lines Depo,us. .. . .. l.862 1.639 55 32 136 I ederal funds purchawd and repurchse agreements . 902 902 l t hher intere+beanng liabdion . 202 66 136
)
~linal internt.beanng habilnies 2,966 2,607 55 32 272 Internt wnwenity pmnon . l 16 450 527 1.040 Cumulanvc interest wnunvay pmoon . 16 466 99) 2.03)
%Iu.ta . alm,rmort su nom.Jue rne wue ,l.n poutwn i l
) I ( l I n, l i j l i
i Finantial Review y As the previous table shows, on December 31,1986, State Street had $16 million more of assets than liabilities maturing or repricing within the succeeding three months. Within the twelve-month timefratne, the position was $993 million more in interest. sensitive assets than in liabilities. The Corporation maintains flexibility in its balance sheet to adjust , its gap position. State Street's interest. bearing sources of funds are predominantly i short. term and the Corporation correspondingly has mai, rained a generally short i structure for its interest-earning assets, including loans. Within the shorter timeframes, State Street .diusts its gap position to increase earnings in a changing rate environment. During 1986, the Corporation reduced the maturities on some efits short.rerm liabilities and, as a result, benefitted further from declining interest rates. . The Tax Refotm Act of 1986 The Tex Reform Act of 1986 will adect State Street's business in 1987, and to a greater extent in 1988 when the majority of the provisions of the new law are fully edective. li is hard to predict how markets that have been tax-advantaged will adjust to the new tax law. Because of State Street's business mix, any negative l adjustments will likely be more than o6 set by the benefit frorn the reduction in the Corporate tax rate. ! i The repeal of the investment tax credit will have a significant impact on the leasing business, necessitating changes in the form and pricing structure of ! leases. Interest expense related to holding most of the newly acquired tax ex,empt securities will no longer be tax deductible, making these investment securities , less attractive. Mutual funds will become relatively more attractive investment I vehicles, and individuals will have additional cash to invest. O# setting this may be { somewhat slower growth in IRA investments in mutual funds, as some individuals , { previously contributing to IRAs will no longer have their contributions fully tax deductible. The change in the treatment of the provision for loan losses for tax purposes will have no significar.: earnings impact on State Street, as the Corporation's tax deductions have essentially been limited to net charge o6s for several years. The tax. basis bad debt reserve will be recognized as taxable income over four years. This will have a moderate impact on cash flow but no direct irapact on the income statement. The Fedecal tax rate has been reduced from 46% in 1986 to 40% in 1987 and to 34% in 1988 State Street currently pays substantial taxes.The reduction in the corporate tax rate will lower taxes in. mediately, and over time this rate reduction could be of increasing benefit u State Street's businesses, currently taxed at a 46% rate, continue their rapid growth. Inflation i As measured by the preliminary GNP deflator, inflation was 2.7%. i While the edett of in8ation was relatively unall in 1986, over time inflation does adect reported earnings. Reported earnmgs redet the impact of inflation on other operating expenses, fee income, and net interest income. The costs of doing business, including compensatmn, other personnel costs, othe space, and equipment, are impacted by ndation as well as other factors. Odsettmg this, State Street mamtams the flexibility to reprice most of its products and services. To the degree that inflation inBuences the level of market mierest rates, mtlation has an impact on net interest income. ; l i i l
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l'inant ial Res iew Comparison of 1985 Versus 1984 In 1985, fully diluted earnings per share were $1.45. This compares with
$1.29 in 1984, when earnings per share included $.08 from a gain on disposition of opcions.When this non-recurring item is excluded from 1984, earning; per share were up 20%.
In 1985, iaxable eqsivalent net interest income increased 21% to $184.5 million. This improvement resulted primar,1y from a 31% increase in noninterest-bearing deposits, and also from a 25% increase in loans.The benefits of balance sheet growth w.'re partiall:/ offset by the edect of lower short-term interest rates, ahich ave New about tso percentage points lower in 1985 than in 1984. Net interest margin dcAned from 4.96% to 4.68% due to lower interest rates and the resulting lower asset yields. The provision for loan losses charged to income vas $12.5 million in 1985, up from $4.0 million in 1984.This was due primarily to the 25% increase in average loans, and also because of a $2.2 million increase in net loans charged-od. Net loans charged od expressed as a percent ge of aserage loans were .34%, compared with .25% in 1934. The allowance for loan losses at the end of 1985 was
$36.2 million, equal to 1.78% of ending loans.
Other oper: ting income was $177.7 million in 1985. This compares with
$143.1 million in 1984, which included $5.4 mil l ion from a gain on disposition of options. Excluding this non recurring item from 1984, other operating income was up 29%.The largest component of other operating income, fiduciary compensation, increased 26% to $122.4 million primarily due to new business.
Othe operating exp n,es increased 22% to $232.2 million in 1985.The largest component of non interest expen:e, personnel costs, was up 23% as a result i of additional stad added to process incieased business. The Corporation's edective tax rate was 38% in 1985. This compares with 36% in 1984, when the edective tax rate was lowered by a gain on d.sposition of options taxed at the capital gains rate. 1 l 1 i i l l
I. - Consolidated Statements of Condition Swe Street Boston Corpor.utson .und %budurws (Dollars in thousands) December 31, 1986 1985 Assets Cash and due from banks-Note B . . .... . . . 51,323,412 5 818,821 Interest bearing deposits with banks . .... . . ... .. . . . 1,047,435 891,143 investment securities (market value $1,644,316 and $1,276,939)-Note C . .. . . 1,622,477 1,271,748 Trading account assets . . . .... . . . .. .... . .. . . 33,740 167,589 Federal funds sold and securities purchased under resale agreements .. 455,000 981,550 Loans (net of unearned income of $3,342 and $5,109)-Note D . . .. 2,169,490 2,031,661 Allowance for loan losses . . . . . . . . (42,355) (36,214) Net loans . . . .. . . 2,127,135 1,995.447 Premises and equipment, net-Notes E and G . ... . . .. .... 131,190 72,152 Customers' acceptance liability . . . . . . 216,852 260,606 Accrued income receivable . . . . .. .. .. 111,503 %,774 Other assets . . . . . . . . . . . 121,074 %,865 Total Assets . .. .. . . .. . .. .. 57,189,818 56,652,695 1 Liabilities Deposits: Noninscrest bearing: ) 1 Domestic . . .. . . .... . $3,382,719 $2,678,457 Foreign . . . .. . . . 23,540 17,772 { 1 Interest bearing: Domestic .. . . . .. .. .. 1,321,887 1,297,416 Foreign l'
. . . . 541,450 576,256 Tota! deposits . . . . . . . . . 5,269,596 4,569,901 Short-term borrowings-Note F .. .
.. . .. .. . 968,028 1.206,830 Acceptances outstanding . . .. . . . . . . . 218,158 263,030 Accrued taxes and other expenses-Note N . .. . .. .. 113,592 1;3,316 Other liabilities . .
. . . . 92,087 136,281 1 ong term debt-Note G . 135,991
. 70,129 Total Liabilities . . . . 6,797,454 6,329,487 l I
Commitments and contingent liabilities-Note Q Sec,ckholders' Equity-Notes G, H and i Preferred stock, no par: Shares authorized,3.500,000; none issued Commen stock. $1 par: Shar s issued, 35,078,000 and 17,048.000 35,078
. 17,048 ;
Surplus 38,671 46,542 Retained earnings 318,615
. . 259,618 Totsi Stockholders' Equity . . . . 392,364 323.208 Total Liabilities sad Stockholders
- Equity . $7.180 818 $ ;.,652,695 j
Ser nasa to co.nduLiedSn.n=rcul swe*oesn. ! l lho.rs ta., l I l 1 l 1
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i. Consolidated Statements of income Swe Street Baton Corpu awn .und subudurw,
. , , , - - . . . ~, - --. . - . . - - . - - - . _ . .
(Dollars in thousands, except per share data) 1986 1985 1984 Interest income Loans,inchiding fees . .. . . . $160,488 $157,365 $156,384 Investment securities: U.S. Treasury and Federal agencies . .. . 90,461 78,656 57,651 State ud municipal (exempt from Federal taxes) ... ... 17,410 13,121 11.442 Other investments . 13,795 4,592 4,748 Trading account assets . . . . . . 4,029 5,399 3,490 Deposits with banks . . . .. .. . .. 64,957 76.074 81.956 Federal funds sold and securities purchased under resale agreements .. . 41,165 31,905 22,140 Total interest income , . . . . . . 392,305 367,112 337,811 Interest Expense Deposits . . . . . . . . .... .. . . . . . 117,205 127,487 126,854 Short term borrowings . .. . . . . .. ?',233 77,523 76,505 Long term debt . . . 6,854 6,525 6,812 Total interest expense . . . . 3 11,292 211,535 210,171 Net interest income . . . . . ... . 181,013 155,577 127,640 Provision for loan losses-Note D . . .. 17,914 12.501 3,998 Net interest income after provision for loan losses 163,099 143,076 123,642 Other Operating Income Fiduciary compensation . . . . . . .. . 176,643 122,444 96,936 Bank card fees . . . .. . . . 23,698 20,468 16,577 Gain on disposition of options-Note J . .. . 5,412 Other-Note K ,
... .. . . . 47,643 34.785 24,178 l
Total other operating income . . . . 247,984 177,697 143,103
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Income before other operating expenses . . 411,083 320,773 266,745 l Other Operating Expenses Compensation . . . .. . . .. l
. . 140,649 113,670 89,435 Other personnel costs-Note M ,
. .. . . . 20,296 17,529 17,636 l Occupancy, net . . . 21,714 15,159 12,657 I Equipment . . . . 22,857 18,279 14,835 Other-Note L , . 95,478 67.556 55,325 '
1 Total other operating expenses . 300,994 232,193 189,888 ' income before income taxes 110,089 <'8,580 76,857 j income taxes-Note N . 38,694 33.326 27,842 Net Income .
$ 71,395 $ 55,254 $ 49,015
= . = . = - - - - . . -
Earnings per Share Primary $1.97 slR $1.42 Fully diluted 1.84 1,45 1.29 l Average Shares Outstanding (in thousands) Primary 36,178 34.584 34,666 Fully diluted 39,552 3a,300 39,577 i sn ,wus eo w,wiss@wwut m.w.w.ra l ll.nen it.v., l ~ _ _ _ _ _ - - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . - . - . _ _ _ _ _ . . _
; Consolidated Statements of Changes in Finantial Position Staar Semt Baton Corporation and Subudunes (Dollars in thousands) 1986 1985 1984 Source of Funds From Operations:
Net income . . . ..... . . ... ... . . ... . . $ 71,395 5 55,254 $ 49,015 Provision for loan losses . . . . . . . ..... ... . 17,914 12.501 3,998 Deferred taxes . . . . . . . . . . . . ..... ... .. .. . 5,857 20,453 13,487 Depreciation and amortization. . . . . .. . . .. . 14,303 8,287 5,640 Total funds from operations . . . . . . . . .. . . 109,469 %,495 72,140 1ssuance oflong term debt . .. .... . . . .. . 75,000 issuance of common stock. . . . .. . . . . . ... 10,159 614 125 Issuance of treasury stock . . . . . . . . .. . 10,976 297 Increase in: Deposits. . . . . . . . . . .. . . . . .. .. . . 699,695 1,358,871 719,543 Short-term borrowings . . . . .. . .... .. 410,610 Othe, liabilities . ...... .. . . .. ... .. 78,809 Decrease in: Cash and due from banks . . .. . . ..... 18,849 Trading account assets . . . . . . .. . . . . 134s004 Federal funds sold and securities purchased under resale agreements. . . . . . .. . . . 526,550 Other assets. . . . . . . ... .. ... ... . . . . . 85,952 Total Source of funds . . . . ... . . . . $ 1,554,877 $ 1,975,224 $ 878,057 i Use of Funds ) Cash dividends declared. , )
. . .. .. . . $ 12,506 3 9,907 $ 8,330 !
Conversions and payments of long term debt . 9,136 11,463 555 l Common stock acquired . . . . . 214 15,812 Increase in: l Cash and due from banks . . . . .. .. .. . . .. 504,591 393,789 interest bearing deposits with banks . . . . . .. .. 156,292 153,272 49,594 Investment securities . . .. . . . . . 354,652 473,629
.. .... 15,871 Tr2 ding account assets . . . . . . . . 148,125 Federal funds sold md securities purchased ~
under resale agreements. . . .. ... . 606,913 22,574 Loans. . .. .. ... 149,602
. . . . 4 % .197 283,747 Premises and equipment . l 69,484 20,200 8,273 i Other assets. .. 39,027 55,304 Decrease in:
Shottaerm borrowings .. .. . 238,802 78,542 Other liabilities . .. . 20,785 97C Total Use of Funds. .
$ 1,554,877 $ 1,975.224 $ 878g ser ,une, so conuhdaa tpn.,ncut uawnem i
I [ht s I,m r I:
^l. Censolidaird Statements of Changes in Sio<kholderi Equity staar seat hwan Cuprarion and subudurw, L Common Retained Treasury (Dollars in thousands) Stock Surplus _ Earnings _ Stock Total Salance at December 31,1983............ $ 8,676 $ 58,928 $173,705 $ $241,309 Net income . . . . . .. . . ...... .. .... . .. . 49,015 49,015 Cash dividends declared, $.25 per share . . . . . , (8,330) (8,330) Issuance of common stock (7,869 shares). . . . . . 8 117 125 Issuance of treasury stock (23,652 shares) . . . . . (498) 795 297 Common stock acquired (480,000 shares) . . . (15,812) (15,812) Balance at December 31,1984 . . . . . . . .. 8.684 58,547 214,390 - (15,017) 266,604 Net income. . ............... . . .., 55,254 55,254 Cash dividends declared, $.30 per share . . . . . . . (9,907) (9,907) Stock dividend, two-for.one spli . . . . .... ,,. 8,330 (8,330) Issuance of common stock (34,772 shares). . . . . . 34 580 614 .I Issuance of treasury stock (459,709. hares) . . . , . (4,255) 15,231 10,976 Common stock acquired (1.361 shares) . .. (214) (214) Fareign currency translation. . . .. . (119) (119) Balance at December 31,1985.. .. . . . . . 17,048 46,542 259,618 323,208 , Net inco me . . . . . . . . . . . . . . . . .. . 71.395 71,395 Cash dividends declared,5.36 per share. . . . . . .. (12,506) (12,506) Scock dividend, two-for.ons split . . ... . 17,331 (17,331) Issuance of common stock (699,f31 shares). . . . 699 9,460 10,159 Foreign currency transla. ion .. ..... . 108 108 Balance at December 31,1%6. . . . . ... . $35,078 $38,671 $ 0 $392,364
$3_18,615 See note to comaMatedfnonc.J r seemes l
I II. err) A:s l l l
Notes to Consolidated Financial Siaiement, Swr Surrt Swan Corporatwn amiSabwturm 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 accounting policies are summarized below. Basis of Presentation: The consolidated financial statement.s 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 accounts and transactions have been eliminated upon consolidation. State Street's investment in its 50% owned adiliate, Boston Financial Data Services,Inc, is accounced for on the equity method. On May 3,1985 State Street acquired the net assets of Contin <rtal Illinois Bank (Switzerland). The acquisition has been accounted for as a purchase and, accordingly, the accompanying consolidated financial statements include its results of operations from date ot acquisition.The acquisition cost and the prior operating results are not material to the consolidated financial statements. Income and expenses are recognized using the accrual method of accounting except for certain trust fees and other sources of income and expense which are recorded as received or paid. These exceptions are immaterial to the results of operations. Certain 1985 and 1984 amounts have been reclassi6ed to conform to the 1986 method of presentation. Where appropriate, number of shares and per share amounts have been restated to reflect stock splits (see Note H). Securities: Investment securities are stated at cost adjusted for amortization of premiums and accretion of discounts. Gains or losses on securities sold are computed based upon identified cost. Income taxes related to net securities gains were $390,000, $373,000 and $38,000 ir 1986,1985 and 1984, respectively. Trading account assets are car ied at market value, j 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. Subsidiaries of State Street provide equipment 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 i mcome. Leveraged leases, a form of financing lease, are carried net of nonrecourse debt. Unearned mcome on direct financing leases and leveraged leases is amortized over the lease terms by methods producmg approximate level rates of return on net lease assets and net investment in leases, re pectively. Allowance for Loan Losses: The adequacy of the a llowance 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 etiect 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 iudgment of the amount necessary to maintain the allowance at a level adequate to absorb probable losses. j i Foreign Exchange Trading: Foreign exchange trading positions, including ledger balanses and spot and forward contracts, are valued daily at prevailing exchange rates. The resulting gam or loss is included m other oper-ting mcome. ) Foreign Currency Translation: The assets and habilities of foreign operations are translated at exchange rates prevailing at the end of each year, and mcome and expense accounts are translated at nerage exchange rates m effect durmg
)
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1 l Notes to Consolidated Finan,ial St.aeniens j Stau Semt Boston Corpratwn and %budursa l j l l Note A-Summary of Significant Accounting Policies (continued) I the years. Gains or losses from the translation of the net assets of certain foreign subsidiaries, net of foreign currency hedges and related taxes, are charged or credited to retained earnings. Gains or losses from other translations are included ; . other operating income. Interest Rate Futures: Financial futures are used by State Street to provide hedgn on certain net interest sensitive positions. Futures contracts are adjusted to market value on a current ba:is and gains or losses are inc!uded in other operating income. Premises and Equipment: Premises and equipment are stated at cost less accumulated depraiation and amortization. Depreciation and amortization (harged to expense are computed by the straight line method using rates based on estimated useful lives. Pension Costs: Actuarially determined costs of pension plans, induding amortintion of prior senice costs, are funded annually. Income Taxes: Provision for income taxes includes deferred income taxn arising e a re. ult of reporting certain items of income and expense in diderent years for tax and finasial reporting purposes. Investment tax credits are accounted for using the deferral inethod under which tax benefits are recognized ratably over j the lives oi the assets acquired. Earni gs Per Share: The computation of primary earnings per share ' is based on the weighted werage number of shares of common stock and common stak equivalents outstanding during each year. The computation of fully diluted earnings per share is based on the assumption that the convertible capita! notes and debentures had been converted as of the beginning of each year, with the elimina. tion of related interest expense less income tax e6cet. Note B-Restrictions on Cash and Due from Banks I Subsidiary banks are required to maintain reserve balances with the l'ederal Roerve Banks. The aserage reserve balance for the year ended December 31, 1986 was $l90.798,000. Note C-Investment Securities l Insntment securities consisted of the following at December 31: l l (Dollars in thousands) 1986 1985 Cost Market Cost Market U.S. Treasury and Federal agencin $ 1,046,230 $ 1,C65,117 5 852,465 5 864,433 State and municipal 287,354 290,334 351,224 344,360 Other insntments 288,893 288 865 68,C59 68,146 Tot al invest ment securitin $ 1,622,477 $ 1,644,316 $ 1.271,748 $ 1,276,939 Scturitin tarried at $H33,3l9,0C0 and 1927.407.000 at December 31,1986 and 1985. rnpettively, were dnignated as suurity for public and trust deposits, borrowed funds and for ocht-r purposes as prusided by law. 1,' r,,
. Nctes to Consolidated Financial Siatemenu Staer $tner Awaan Corporazwn and %khanes '
l Note D-Loans I i Loans, net of unearned income, included the following at December 31- ! (Dollan in thousands) 1986 1985
]
Commercial and financial .. . .. . ....... .... $ 1,232,863 $1,198,220 Real estate construction . . . 189,060 {
. .. . .. ... . .. 175.858 Real estate mortgage . .. . .. .... .. . I10,742 72,204 l Instalment and consumer . . . . . . ...... ..... ... 395,198 311,420 Foreign . . . .... . . .. ... . ... .. .. .. ... 142,344 182,266 ,
Lease 6nancing . .... , . . . . . .. . .. . . 99,283 91,693 ' Loans, net .. .... .. . ....... ... .. $2,169,490 $2,031.661 l _ included in loans at December 31, are non accrual loans as follows: )
'1 (Dollars in thousands) 1986 1985 Non accrual loans . . . . . . . . . . . . . . . .
....... .... .... $9,330 $10,595 Interest income which would have been recorded under ;
original terms ... .. ...... . .. . .. ... . 195 1,350 Interest income actually recognized. . . . . . . .. .. ... 419 714 At December 31,1986 and 1985, there were no loans outstanding whose terms had been renegotiated to provide a reduction or deferni of interest or principal because of a deterioration in the finsacial position of the borrower. At December 31,1986 there were no commitments to lend additional funds to debtors whose terms had been modi 6ed in troubled debt restructuring. Changes in the allowance for loan losses for the years ended , December 31, were as follows: (Dollars in thousands) 1986 1985 1984 Balance at beginning of year . . . . .. .. $36,214 $27,Il5 $26,4% frovision for loan loues . . ... 17,914 12,501 3,998 Loans charged o6. . . . . . . . . . .. . (17,133) (12,117) (7,242) Recoveries previously charged oH . . . .. .. 4,720 6,492 3,8c3 Allowance of subsidiary purchased . .. . . . 1,807 Foreign currency translation . . . .. 640 l 41_6 Balance it end of year . . $ 42,355 $36.214 $ 27,115 j TT Q. . \ Note E-Premises and Equipment Premises and equipment consisted of the following at December 31: . (Dollars in thousands) 1986 1985 Buildings and land . $ 92,493 $ 51,254 Leuchold improvements . 40,397 23.299 Equipment .. 56,434 44.159 189,324 !!8.712 Accumubted depreciation and amortization . (58.134) (46.560) Premises and equipment, net $ 131,190 $ 72.152 f ;,,,n . , ,
Nove> to Cone,ulklate I Finant ial Statements State Srner Boston Corporation and %klurm Note F-Short Term Borrowings Short.scrm borrowings consisted of the following at December 31: (Dollars in thousands) 1986 1985 Federal funds purchased ... ... . .. .. 5 277,100 $ 290,260 Securities told under repurchase agreements . .. .. 624,353 830,932 U.S. Treasury demand notes . ... . . . . ..... 45,000 45,000 Other . . . . . . .. ... ... .. .... . .. 21,575 40,638 Total short-term borrowings .. . . .. 5 9&8,028 $ 1,206,830 Federal fu6.ds purchased generally represent one day borrowings. Securities sold under repurchase agreements are borrowings, which generally mature from 1 to 49 days, secured by U.S. Treasury and Federal agency securities. State Street's lines of credit with various banks aggregated $27,000,000 at December 31,1986. These lines of credit have not been activated. There are no compensating balante requirements under these agreements. Note G-Long. Term Debt The following are included in long-term debt (less unamortized original issue discount, where applicable) at December 31: (Dollars in thousands) 1986 1985 8%% Notes due 1996 , ........... ... . ... ....... $ 74,631 5 7%% Convertible subordinated debentures due 2008. . . 31,517 39,184 9%% Mortgage note due 2009 . . . .. . . .... . 29,134 29,502 5% Convertible capital notes due 1994 . . . .... 711 1,443 Total long. term debt .. . .. ... . .. $ 135,993 5 70,129 The 8%% notes are direct, unsecured obligations of State Street.The notes may be redeemed in whole or in part, at any time on or after November 1, l ' 1993 at 100% of the prmcipal, with accrued and unpaid interest to the date fixed for redemption. The 7%% convertible subordinated debentures are convertibic at the option of the holder at a conversion price of $11.50 per share, subject to adjustment for certain events.The debentures are redeemable at any titue at the option of State Street, in whole or in part, at a price of 106.20% at May 1,1986, and declining annually to par at May 1,1998 and thereafter. At December 31,1986,2,7+0.609 shares i of authorized common s'uck have been reserved for issuance upon conversion. l During 1986 and 1985,57,667,000 and $10,816.000 of notes were converted into 666,6% and 940,476 shares of common stock, respectively. Aggregate maturities of the mortgage note for the years 1987 through l 1991 are $408,000,3448,000,5493,000,5542,000 and 1591,000, respectively. At Decernber 31,1986, property having a net book value of approximately $39,944,0C0 serves as collateral for the mortgage notes. The 5% notes are convertible at any time into common stock of State Street at a conversion price of $3.97 per share, subject to adiustment for certain events. During 1986,1985 and 1984,5732,000, $30,000 and $250.000 of notes were converted into 184.439, 78.866 and 62,936 shares of common stock, respectively. At December 31,1986, P9,147 shares of authorized common stock have been reserved for issuance upcm conversion.
'N J f[- 3 ,
l. Notes em Conwlidated Finamial Stairmemi, y $sese $tme Bauen Cepratwn and Subul mes p y -i- . bi [ r Note H-Stockholders' Equity ' The authorized number of common shares increased from 14,000,000 to 28,000,000 in 1985 and 28,000,000 to 56,000,000 in 1986. In 1985 and 1986, State c Street distributed a ewo-for.one stock split in the form of a 100% stock dividend to stockholders resultmg m an mcrease in commen shares of r,300,000 and 17,331,000,
]f respectively. The par value of these additional shares was capitalized by a transfer ' !
1 j from surplus to common stock. Under the 1981 Stock Option and Performance Share Plan ("1981 l Plan") fer officers at the policy making level, an aggregate of 2,400,000 shares of common siwk may be issued. The crercise price of non-quali6ed and incentive stock options may not be less than the fair market value of such shares at the date
,j. granted and expire no longer than teo years from date of grant. Stock appreciation rights (SARs) were granted under the 1981 Plan, whereby the grantee may surrender 'L exercisable options and receive cash, common stock or a combination of both, 5
measured by the difference bet ween the optiou price and the fair market ealue of the stock on the date of surrender. Performance shares granted under the 1981 Plan
- f. are carned by the participants over a p rformance period, as defined by the 1981
! Plan,in relation to the degree of attamment of performance between minimum and maximum performance targets. Payment for performance shares will be made in
':j [ cash equal to the fair market value of the common atock after the conclusion of each performance period. No further grants will be made ur. der the 1981 Plan shich espired in April,1986.
.l' The 1985 Stock Option and Performance Shares Plan (**1985 Plan"),
similar i terms to the 1981 Plan, was adepted by the Board of Directors and ,;l approveu by the Stockholders in 1985. Under the 1985 Plan, options and SARs i
! ccvering 1,000.000 shares of common stock and a maximum cf 1,000,000 ,
j performance shares may be issued. Compensation expense is recorded for performance shares equal to the
' fair market value of common stock of State Street for the estimated number of shares to be awarded. Compensation expenw related to performance shares and 5ARS for 1986,1985 and 1984 was 53,439,000,53,779,000 and $1,832,000, respec'.svely.
Under the 1984 Stock Option Plan ("1984 Plan") the maximum number of shares of common stock which may be issued is 1,400,000 shares. Stock options awarded under the 1984 Plan are intended to qualify as incentive stock options but may be granted as non. qualified stock options. Options may be xcompanied by sto6k appreciat on rights. The option price of incentive stock options may not be less than the feir market value of the common stock on the date of grant and the option price of non-qualified stock options may not be less than 50% of the fair market value of common stock on the date of the grant, No option may have a term greater than ten yeart An opnon may be exercised by the payment of the option price in cash or by the delivery of shares of State Street common stock having a market value equal to the option price or by a combination of cash and suwk. Staic Street has granted non. qualified and mcentive stock options to purs ha$e shares of common sto,k to tertain otlicers of Stare Street and its subsidiaries under a long. Term Common Stock Incentive Program. Options become exercisable 6ve years from date of grant and exp;re no longer than ten years from date of grant. Non$ qualified options inued under this plan permit the optioner to resell to State Street not more than 50% of such options, incentive stock options were granted at a prwe not less than the t' air market value at the date of the grant. This plan expired in 12ebruary,1984. l 1 l
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E Notes to Consolidried Financial Staiement, i
" Sener $nnt naston Corpor.stion and t u nes }
.h. i p - t Note H-Stockholders' Equity (continued)
! Option activity durin6 1986 and 1985 was as follows:
Option Price F
}l , '
(in thousands, except per share amounts) Shares Per Share Total
.. Outstanding. January 1,1985 . . . . . . . . . . . . . . . 2,224 $ l.38 8.54 $ 8,449 R G ran t ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 881 11.69 16.97 14,012
, E xerci ud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . '(163) 1.38 4.36 (378) U Cancelled or expired . . . . . . . . . . . . . . . . . . . . . ( 2.57 12.85 _219) (798) 1 Outstanding, December 31,1985............... 2,723 1.38 16.9/ 21.285 c.
' ' G rant ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... til 22.47 2,488 Exerc ised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125). 1.38 2.57 (310)
Cancelled or expired . . . . . . . . . . . . . . . . . , . . . (83) 2.57 22.47 (740)
! Outs anding December 31,1986... ........ .. 2,626 1.38 22.47 $22 723 4
At December 31,1986,1,152,316 options and 147,200 SARs were exercisable and 1,477,510 options and SARs were available for future grants. During l I 1984,50,096 options were exercised at a price of $1.38 per share. h Note I-Restricted Net Assets Federal and State banking regulations place certain restrictions on
- '. dividends paid and loans or advances made by subsidiary banks to State Street. At c December 31.1985 net assets of State Street Bank amounting to $184,039,000 secre
, [ available for distribution to State Street in the form of dividends and loans or Lp advances. L!' At December 31,1986, consolidated retained earnings included
$1.212,000 of undistributed earnings of Boston Financial Data Services,Inc., a 50%
' i owned affiliate. Note J-Disposition of Options On March 21,1984. a settlement wu reached on the lawsuit by State Street to enforce the exercise of options acquired in 1980 to purchase common stock of a bar.k holding company. Ut der the terms of the settlement Staee Street received cash and recognized a gain of $5,412,000. This increased net income $3,146,000 or 5.08 per share fully diluted. Note K-Other Operating Income The following items are included in the "other" category of other operating income for the years ended December 31: i (Dollars in thousands) 1986 1985 1984 Foreign exchange trading . . .. .. $14.299 $ 5.674 $ 2.175 Service fees . . ... .. . . . 12,114 9.893 8.228 Correspondent service fees . . .. . 8,534 8.293 9,048 Trading gains (lones). net . . . . . 1,477 1,377 (265) Securities gains (losses), net . . 738 706 72 Other . . . . 10,481 8.842 4,920 Total "o.her" . .. 547,643 534.785 124.178 i
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,- ,o Notes to Consolidated Finansial Statemeni.
L State se,ect Boston Corpo . mon .und Sub,sdarws L Note L-Other Operating Expenses , The following items are included in the "other" category of other operating expenses for the years ended Decerr.ber 31: (Dollars in thousands) _ , , 1986 1985 1984 External contract services . . . .. . .............. $ 18,398 $ 12,381 $ 10.274 Postage, stationery and supplies . . . . . . . . . . . . . . . . . 11,416 9,505 7,717 Professional fees . . . . . . . . ..... ............... 9,876 7,156 6,896 Telecamtrunications ... ........... .......... 8,497 5,457 4,526 Advertising and customer contact . ... ... ...... . 7,192 7,590 5.921 insuraace . . . . . . . . . . . . . . . . . ......... 6,789 3,737 2,188 Other.................................. ... . 33,310 21,730 17,803 Total"other" . . .. .. ..... ....... ...... $95.478 $67,556 $ 55,325 _ ._.u. -u := Note M-Retirement and Salary Savings Plan i
' State Street and certain subsidiary companies participate in i noncontributory retirement plans covering employees eligible as to age and length j of service. Contributions to the plan are funded as accrued, and are limited to I l amounts that are currently deductible for tax reporting purposes.
Effective July 1,1985, State Street changed its actuarial vals.ation method to the projected unit credit me: hod from the entry age normal method.
-This new method resuhs in an annual pension expense which more appropriately 1
matches the cost of projected retiremer t benefits to the year in which such bene 6ts i are earned. Revisions were also made in the assumed weighted average rate of return on investments and the assumed rate of wage increases.These changes, combined ' i with strong investment performance, have resulted in decreasing retirement expense since 1984. Total retiremer.: expense for each of the years ended December 31, actuarial assumptions, accumulated plan benefit information as estirnated by consulting actuaries, and plan net assets at June 30 (the actuarial valuation dates), were as follows: (Dollars in thousands) 1986 1985 1984 Totai retirement expense .. ..... ...... ..... $ l.532 $ 3,690 $ 4,736 : Weighted average assumed rate of return . .. . . 6% 6% 5% - Wage increase assumption ..... ..... ....... 5 5 4 Actuarial present value of accumulated plan benc6ts: l Vested . . . . . ... 1
.. . .. $ 44,532 $ 42.395 $ 43.881 Nonvested . . . .. . . . . 3,012 2,134 1,922 Total . . . . . . . . $ 47,544 $ 44,529 $ 45,803 Net assets available for bene 6ts $94,8[5 $75,477
. , _ $573__7 Employees of Stare Street and cerrain subsidiarycompanin with wo or more years wrvice are chgible to participate m State Street's salary savings plan.
State Street's related expenses were $1,808.000, $1.476.300 and $1,359,000 in 1986,1985 and 1984. respectively. State Sireet and (crtain subsidiaries provide health care and life insurance bene 6ts for retired employees. The cost of such benents are not materid and are expensed as claims are paid. I r .. . . . I
a
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- Notes to Consolidued Financial Statements State $rms beston Corpoutwn ml subudianes 1
i 1 Note N-Income Tames I The, provision for axes included in the Cor solidated Statements of Income is comprised of the following: (Dollars in thousands) 1986 1985 1984 i Current: I 1 Fede ral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,911 5 4,213 $ 7,176 ! State...... .... ................. ......... 10,926 8,660 7,179 Total current ... .. ........ ....... ...... _32,837 12.873 14,355 Deferred: i i Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,127 18,001 11,706 . State...... ... ....... .... .... ........... 2,730 ? 452 1,781 ! Tot al deferred . . . . . . . . . . . . . . . . . . . . . . . . . . 5,857 20,f53 13,487 Total income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 38,694 533,326 $27,842 The provision for deferred income taxes, which result from the recognition of certain items in different years for 6nancial and income tax reporting purposes, is comprised _of_he f.o.llowi_ng:_ (Dollars in thousands)_ _ , , , , _ 1986 1985 1984 Lease 6nancing . . . . actions . . . . . . . . . . . . . . . . . . . . . . $ 15,168 $ 14,165 $ 7,201 Investment tax credit ......... ................. 9,966 5,906 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . (2,800) (2,721) (330) Other net . . . ... ... .... .. ... .. ........ (6,511) _ 957) ( 710 Total defer red . . . . . . . . . . . . . . . . . . . . . . . . . . . $_ 5,857 $20,453 $ 13,487 A reconciliation of income taxes to an income tax provision computed by applying ihe Federal statutory tax rate to income before income taxes is as follows: (Dollars in thousands) 1986 1985 1984 Federaliacome taxes, at statutory rate ..... . .. . $ 50,641 $ 40,747 $ 35,317 increase (decrease)in taxes resultmg from: Tax exempt income . . . . . . . . . . . . .... ... (12,186) (10,957) (9,309) State taxa net of Federal benent . . . . . ... .. 7,374 6,000 4.837 investment tax credit amortization . . . .. (2,672) (2,973) (2,198) Leveraged leases-tau rate change .. .. . . (4,715) Other, net . ...... .. . . .. . 252 509 (805) Totalincome taxes . . .. . . . $38,694 $ 33.326 $ 27,842 Deterred income taxes payable, included in accrued taxes and other expenses, were $44,951.000 and $40,466.000 at December 31,1986 and 1985. respectively, included in these amounts mere deferred investment tax credits of
$9,700.000 and $14.745.000, respectively.
Under Generally Accepted Accounting Principles, the lower tax rates in future years, which acre brought about by the Tax Reform Act of 1986, required the Corporation to recalculate its net mvestment m leveraged leases and recognize ehe effect m 1986. This resulted in a 51.143.000 decrease in loan interest income, a
$4.715.000 reduction in the provision for income taxes and a $3,572.000 increase to net income or $.09 per fully dilu:cd share.
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Notea to Conwlidaied Financial Statemenia ! Swe $rms Ba,ron Corporadon .und Subwb.orws Note O-Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of operations. Certain 1986 and 1985 amounts have been reclassified to conform to the 1986 method of presentation. Where appropriate, number of -hares and per share amounts have been restated to reflect stock splits (see Note H). (In thousands, except per share amounts) 1986 Quarters First Second Third Fourth
- Interest income . . . . . . . . . . . . . . $ 100,462 $ 100,174 5 94,955 $ %,714 Interestexpense . .. .. .... ..... 57.143 48,422 56,347 _ 49,380 Net interest income . .. . .. .. . 43,319 43,827 45,575 48,292 Provision forloan tosses . . .. ... . ,.,4,I63 4,373 4,499 4,874 ;
Net interest income after provision for ! loan losses . . . . . . .. ... . 39,151 39,454 41,076 43,418 Otheroperatingincome . . . ... .... 52,773 59,439 65,743 70,029 Other operating expenses . . . . . . . . .
,65,828 ,, 73,039 78,235 83.892 incomebeforetaxes . .. .. .... 26,096 23,854 28,584 29,555 Income taxes . . .... .. ... . 9,867 9,673 11,300 7,854 !
Net income . . . .. ..... . $ 16,28 $ 16,181 $ 17,284 $ 21,701 Earnings Per Share: Primary . . . . . . . .
. . ...... . $.4 ", $.45 $.48 $.59 Fully diluted . . . . . . . .... . 42 .41 .45 .56 Average shares outstanding:
Primary . . . . . . . , .. . .. 35,824 %,188 36,255 36,437 Fullydiluted . .. . .. .. 39.526 39,686 39,584 39,543
%InJn ,o w m arrms g.sm ,m lewr egedlaws of$3. 572.20or 1.09perfully ddaud Am.
(in thousands, except per share amounts) 1985 Quarters First Second Third Fourth Interest income . . .. ... . $ 86,250 $ 91,224 $ 91,878 $ Y7,760 Interest expense 49,330 53,534 53,974 , 54,697 _ Net interest income . .. 36,920 37,690 37,904 43,063 Provision forloan losses . . . 2,444 2,719 3,527 3,811 Net interest income after provision for loan hsses . . . .. 34.476 34,971 34,377 39,252 l Other operating income . 38,474 s2,758 45,975 50,490 Otheroperating expenses . 51.088 55,675 59,101 66,329 incomt before taxes 21.862 22.054 21,251 23,413 Income taxes . . 8.203 8.531 7,864 8,728 Net income $ 13,659 $ 13,523 $ 11,387 $ 14,685 Earnings Pe. Share: Primary . 5.40 $.39 5.39 $.42 j , FullyJiluted .36 36 .35 .38 ) Average shares outstanding: j Pnmary . . . 34.239 34,398 34,601 35.055 Fullydeluted 39.048 39,236 39,115 39,276 l /oo s. l l
. - ra ; i Notes to Consolidated Financial Staiements ; Snese $ tat Susan Conn >r.stwo and 5=Inkrm l l
, Note P-Leases j ,
Rentalexpenseis as follows: (Dollarsin thousands) 1986 1985 1984 Minim u m rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,016 $ 12,774 $ 10,187 i j' Contingent rentals . . . . . . . . . .. .......... ... 817 781 773 j Subicase rental income . . . . . . . . . . . . . . . . . . . . . . . . . . (3,546) - (954) (690)- 1
; Total rental expense . . . . . . . . . . . . . . . . . . . . . . $ 17,287 $ 12,601 $ 10,270 l Contingent rentals relating to leased equipment are based on usage in l- excessof specified minimums.
j Future minimum payments by year and in the aggregate under 2 i noncancellable operating leases with initial or remaining terms of one year or more
! consisted of the following at December 31,1986:
(Dollars in thousands)
, 1987 _.. .._1988. _ _
1989 1990 1991 Thereafter Total
$15,838 $15,301 $12.500 $10,876 $9,860 $48,236 $112,611 l'
! Sublease rental commitments of $5,060,000 through 1993 have been
! deducted from premises commitments. Substantially all leases for premises and
'j. equipment include options to renew.
Note Q-Commitments and Contingent Liabilities The financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business. These include commitments to extend credit, letters of credit, guarantees and foreign es. change j contracts. At December 31,1986, commitments under outstanding standby letters of credit aggregated $128.237.000. On April 19,1983, counsel for Union National Bank, a subsidiary of State Street which was sold to The Conifer Grour, Inc. on December 30.1983,
! received a letter from the Environmental Protection Agency stating the intention of i the EPA to make capenditures under the federal so-called "Superfund" Act toward l the cleanup of a site owned by Silresim Chemical Corporation, to which Union had
! made secured loans from 1970 to 1976. In its letter, the EPA stated thn under the Act, responsible parties may be liable for money expended by the government to take neces ary corrective actions at the site and asserted that the EPA had determined Union to be an owner or operator of the site and is therefore a responsib!c party. Under the "Superfund Act", an owner or operator may be liable for the total costs of the cleanup of the site and other damages which are indeterminate at this time. Union has denied that it ever was an owner or operator of the site. Under the terms of its agreement relating to the sale of Union, State Street agreed to indemnify The Comfer Group, Inc. for any costs which they may incur in this matter. In the opinion of management, this action can be successfully defended or resolved without matenal adverse effect on the financial position of State Street.
l.n it.
p,r I~ r
! Notes to Cun,olidaied Finan<ial St temeni, i
$ nase somet Bauen Corporation and Sab,ulunes l
i
. I i
. J u .
)
4 Note R-Financial Statements of State Street Boston Corporation ' (Parent only) .. Statements of Condition
. (Dollars.in thousan.ds) Dece.mber 31 1986
. . - . - - 1985 Assets Cash and due from banks . , . . . . . . . . . . . . . . . . . . . . . . . . . $ 50 $ 7 Investment securities. . . . . .......... ..... .. .. ... . 16,000 Securities purchased under resale agreements. . . . . . . . . . . . . 20,986 47,268 investment in consolidated subsidiaries:
Bank............... ..... .. .. .. .. ....... 394,925 284,580 i Non b a n k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,579 12,082 l Capital notes of bank subsidiary . . . . . . . . . . . . . . . .... 18,211 18,211 Notes receivable from nonbank subsidiaries . . . . . . . . . . . . 44,781 3,870 investment in unconsolidated affiliate. . . . . . . . . . . . . .. 10,337 5,079 Other assets . . . . . ..... .. .......... . ...... 1,907 7.119 Total Aswis . . . . . . . . . . . . . ..... . ..... . $520376 $378,216 i Liabilities Accrued taxes and other ex .... .. ........... $ 16,689 $ 10,666 Other liabilities . . . . . . . . .. . pen cs . . 4,864
.... . .. . .............. 3,715 Long term debt . . . ...... . .............. .... .. 106,859 40.627 Total Liabilities . . . ..... ... ................. 128,412 55,008 Stockholders
- Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392,364 323,208 Total Liabilities and Stockholders' Equity . . . . . . . . . . $520,776 $378,216 Statements of Income (Dollars in thousands) 1986 1985 1984 Interes and dividend income . . .. . . . $ 6,353 5 6,766 $ 8,457 Gain on disposition of options. . .... . . .... 5,412 Total income. . . . . . .. ... ..... .. 6,353 6[66 '13,869 Interest expense on long term debt . .. ..... . 3,915 3,708 3,964 Other expenses . . . .. .. . .... ... . 1,116 1,751 1,643 Total expenses. . . . .. .. . .. 5,C31 5,459 5,607 Income taxes . .. .. . .. ... . .. 645 363 3,099 Income before equity in undistributed income of subsidia. ies . . . . . 677 944 5,163 Equity in undistnbuted income of subsidiaries and affiliate:
Consolidated bank . . 68,768 54.033 43.650 Consolidated nonbank. . 2,067 924 132 Unconsolidated affiliate . (117) (647) 70
~
70,718 54.310 43,852 Net income . . . $ 71,395 $ 55.254 $ 49.015
=.
l l
1 e.. 1 1 4 Notes to Consoli<taieil l'inaniial Staiement. Swe $rmt Boston Corpoutwo eul Salmdwm i t i l i Note R-Financial Statements of State Street Boston Corporation ] (Parent only)
, Statements of Changes in Financial Position I
(Dollars in thousands) 198s 1985 1984 ; Source of Funds From operations: Net income . . . . . . . . . . . . .............. $ 71,395 $ 55.254 5 49,015
~
Equity in undistributed income of subsidiaries and affiliate . .. .. . . . .... .... (70,718) (54.,U'4 (43,852) Total from operations . . . . . . .. 677 %4 5.163 i
; issuance of long-term debt. . . . .. . . .. 75,000 '
i
' Issuance of common stock. . . . . . . . . . . . . . 10,159 614 125 Issuance of treasury stock . . . . . . . . . . . . ... 10.976 297 Increase in other liabilities. . . . . . . .. 7,250 655 l Decrease in:
l Cash and due from banks . . . ... . . . 53 239 investment securities . . . . . . . . . . . . . . 4,935 Investmes.: in bank subsidiaries . . . .. 72 i Investment in nonbank subsidiaries. . . . . . . . 570 456 Securities purchased under resale agreements . . . 26,282 24,931 Notes receivable from nonbank subsidiaries . . . . 1,649 416 l Other assets. , . ... ... .. . . .. .. .. 5,212 9,465 103 Total Source of Funds . . . .. . .. $ 125,180 $ 24.884 $ %,209 m ._. = - _._ %_ Use of Funds Cash dividends dulared. . . . . . . . .. ..., $ 12,506 5 9,907 $ 8,330 Conversions and payments of long. term debt , 8,768 11,129 250 Common stock acquired . .. 214 15,812 Increase in: Cash and due from banks . .. . .. 43 Investment securities . . . . . .. 16,000 Investment in bank subsidiaries. . ..... .. . 41,577 1,906 Investment in nonbank subsidiaries. .. . 2,828 Securities purchased under resale agreements . . . . 1,179 Notes receivable from nonbank subsidiaries. 40,911 Investment in unconsolidated affiliate . . . 5.375 2,455 Decrease in other liabilities . . . . . 7.083
~
Total Use of Funds. . . . .. $ 125,180 $ I884 S %.209 n :== I
I. i Netra is Consolidated Financial Statemenu i
, Swe Stwt &mtos: Corp .orwn .md L.hudunes !
i m
.l '
Note S-Foreign Activit%s
' The following selected amounts related to foreign opentions are mcluded in the conwlidated financial statements as of and for the years ended
- December 31:
l (Dollars in thousands) 1986 I?*8 1984 Auct s . . . . . . . . . . . . . . ..... ... . . . $ 1,483,01C $ 1,438,280 $ 1,085.369
- Interest and other operating incorne . . .. 98,215 97,634 %,341 i
income before income taxes . . . . . . . . . . . . . 3,314 3,244 1,812 Net income . . . . . . . .. . . .. . 1,225 1,113 827 Interest costs allocated to international operations for domestic funds are based on domestic money market rates. The allocation of administrative expenses is based upon services provided or received. Ii i i )! t 1 f I l i i...,, .w.. I _ _ _ _ _ _ _ _ _ . _ _ _ . _ _ _ l
{..- l Acmuntants' Report l i i
\ To the Samkho!Jers and BuarJ of Directors State Street Boston Corporatsun Boston, ksachusetts We have examined the consolidated statements of condition of Staic Strcci Boston Corporation and subsidiaries as of December 31,1986 and 1985, and the related consolidated statement > of income, changes in stockholders' equity and changes in financial position for each of the three years in the period ended Dnember 31,1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting , rnords and suth other auditing procedures as we considered necessary in the cartumstances. ; in our opinion, the financial statements referrai to above present , fairly the consolidated 6nancial position of State Street Boston Corporation and subsidiaries at December 31,1986 and 1985, and the consolidated results of their operations and changes in their 6nancial position for each of the three years in the period ended December 31,1986,in conformity with generally accepted accounting i principles applied on a consistent basis.
i t l
- r WY Y
! Boston, hsachusetts U
January 13,1987 I i r' i i I i l
~., ,, e e
{3 Supplemental Financial 1)ata i j State Srnet Baston Corporation omd Sabudiaries i i Condensed Average Statements of Condition with Net Interest income Analysis _ . . . . . _ _ _ . _ . _ (Tszable equivalent basis) 1986.. .-. .. (Dollars in miens) Balance Interest Rate Assets Due from banks . .. ... .. . $ 859 Investment securities:
.. . . . . . . . . . . . .. . . . . . . .. . 8 65.0 7.56 %
U.S. Treasury and Federal a State and municipal . .. . . .. .. ..gencies. , . . . . . . . . . .. . . .. .. . .. . .I,004 .. 90.5 9.01 Other investments ..
. . . . . . . . . ... . . ... ... . .. 311 31.9 10.24
.. . . . . . . . .. . . . . . , . . . . . . . . .. . . . . . . 186 14.2 7.63 Trading account r ssets . . . . . . . . . . . . . . . . . ... . . . . . .. . ... . ..... 63 4.6 7.27 lear,s, net of unearned income:
Commercial and financial . . . . . . . .. .. . . ... . . . . . . .. . . .. . . . 1,071 87.0 8.13 Real estate construction. . 192 P.eal estate mort
. . . . . . . . ... . . .. . . . . . ... . .. ... . . 17.8 9.30
. .. . . . 80 Consumer . . . . gag . . . . ... . .. . .. .. . . . 7.7 9.67 Foreign . . . . . . . . . . . . . .
. .. . . .. . . . . . .. . . . . . . .. . . 336 42.8 12.76
. . . . . . . . . . . . . . . . . . 170 12.8 7.55 Leases. . . . . .. . .. . .. .. .. . . . . . .. . . . . .. . . . . . . . . . .. .. . _ 89 7.9 8.89 Tot al loa ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . I,938 176.0 9.09 Federal funds sold and securities purchased under resale agreements. . . . . . . . 606 41.2 6.80 Total interest.carnin 4,967 423.4 Cash and due from banks . . .g assets. . . . . . . .. . . . . . . .. . . . . ..... 8.59
. . . . .. .. . . . . . . . . ..... . ..... 747 Allowance for loan losses . . . .. . . .. . . . .
Premises and equipment, net . .
. . . .. .. . ... . .. . (41)
. .. . . . . . . . . . .. ... . 93 Customerv acceptance liioility . . . . . . . . . . . . . . . . . .. .. ..... 305 Other assets. . . . . .. .. . .. . . . . . . . . . . . . . . . . . . . . .. . . 217 Total assets. . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . .. . $6,288 Liabilities and Stockholders' Equity Interest. bearing deposits:
Savings and NOW . . . . . . . . . . . . . . . . .. . . . . . . . .. . . . .. $ 163 9.1 5.52 Insured money market accounts. . . . . . . . . $16
. . . . . .. ... . .. . . 30.9 5.94 Certificates of $100.000 or more . . . , .
. . . . .. ...... ... 436 31.5 7.11 Other time , . . . . . . . . . . .
. . . . . . .. . .. . . . 36 2.4 6.68 Foreign . . . .
$97 43.3
. . . . . . . . . . . . . . . .. .. .. . . . . 7.25 Total interest-bearing deposits . . . . . . . .. . . . . . . . . . . 1,748 117.2 6.71 Short. term debt . . . . .. . 1,396
. . . . . .. . . .. . . . 87.2 6.25 l.ong.tcrm debt. . . . . . . . . .. .. . 81 6.9 8.47 Total interest. bearing liabilities . . . . . . 3,225 211.3 6.55 Deposits. . . . . . . .
. . 2.241 Acceptances outstanding . , .
. . 306 Other liabilities . . . . 158 Stockholders' equity . . . .
. 358 _
Total liabilities and stockholders
- equity . 56,288 Net interest income . .
$212.1 Excess of rate carned over rate paid . 2'*%
Net interest margin *. . 4.'s45-
- Net marme nwge., n tauHe niunaient net marmt suome Juudniiy aseage mtemt earnung.num Astrage earn for twls ml Je ok rifat nf tk mm m umng gase um Irwv.ugnileaws Intemt suome on m n uuNe :nmement marsom snst loam suluJn ok gnt of t.aude eqannuent adustr*wnes, namg a Fede-d w r.te of W.,
.utsualfor appinaMr aut: s~ ..mr t.un et of ik vriasa' Fe.! red w hmen I.uan /m mdmJni m marmt m ame a.r om n .orrut N....aurm.J lanns are nuluJnt m ontsme var .: nu aarts i.
.-. n .
[] . . .' + ; 1985 1984 1983 1982-Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
.l
$ 803.. $ 76.1 9.47 % $ 725 $ B2.0 11.30% $ 5% . $ 54.5 9.81% $ 480 $ 68.8 14.35% !
745 78.6 10.55 522 57.6 11.05 704 84.5 12.00 507 66.7 13.17 2% I4.6 10.44 l 197 21.9 11.13 194 20.8 10.74 182 23.5 12.94 48 5.4 11.21 43 5.6 12.81 18 1.7 9.68 73 6.0 8.22 % 3.6 9.% % 3.2 8.68 44 5.2 11.59 1,030 103.4 10.03 877 108.9 12.42 711 670 126 13.4 10.64 85 10.8 12.57 80 84 67 7.4 11.04 51 6.9 13.49 181 163 2% 31.3 13.28 191 27.7 14.44 203 184 1% 11.2 8.24 79 9.4 11.79 59 72 65 7.3 10.48 49 6.2 12.33 45 34 1,660 174.0 10.48 1.332 169.9 12.76 1,279 148.9 11.65 1,207 170.7 14.14 392 31.9 8.I4 223 22.I 9.94 360 32.7 9.07 297 16.8 12.37 - 3.957 3 %.6 10.02 3,078 % 2.7. 11.79 3,147 346.3 11.01 2,717 371.7 13.68 543 486 491 572 (33) (28) (29) (26) 66 58 61 60 238 191 149 93 164 !!7 119 119 I
$4.935 $3,902 $3,938 $3,535
$ 157 9.1 5.89 $ !!9 7.6 6.33 $ 182 10.7 5.94 $ 173 10.0 5.77 357 25.9 7.29 228 20.6 9.05 192 16.1 8.37 7 .4 6.50 529 44.0 8.31 580 59.9 10.33 626 %9 9.09 652 84.0 12.87 33 2.6 7.99 26 2.7 10.21 84 8.5 10.10 108 13.4 12.42 535 45.8 8.56 333 %.0 10.82 222 21.0 9.44 222 31.2 14.08 1.6I i 127.4 7.91 1,286 126.8 9.85 1,306 113.2 H.67 1,162 139.0 I1.97 1,018 77.6 7.62 785 76.5 9.75 889 77.1 8.67 750 85.9 11.45 79 6.5 8.27 82 A.8 8.32 69 5.8 8.40 65 5.( 8.55 2.708 211.5 7.81 2,153 210.1 9.76 2,264 1%. I 8.66 1,977 230.5 11.66 1 %0 1,184 1.176 1,056 239 192 149 93 145 122 125 230 293 251 2?4 179
$4.935 $3,902 $3,938 $3,535
$185.1 $152.6 $150.2 5141.2 2.21% 2.03% 2.35 % 2.02 %
4.68 % 4.96 % 4.77 % 5.20 % i 9'
7 e ** e Executis Directors OWicers 1 1 WEaan i F/ gerty jaansa F. Conway,Jr. Ahrt J. Keucy John L Speing Cha,rman Charman dik Board Charsiaa, Arthur D. Lail, wekh & Forbes and Ch e(Faeewin 06cer. Preyram $risem Maagem-ne Peter E. Madden Courwr Corpor= ion Co.9 sy Pm den F4 ward R. Stevens Preindens. Tilliam S. Edgedy Nanned O. Keohane Ames Tenile Corporaison He=rard H. Fairwe=6r Charman Pm dent. Wieslev College Esaram N Pres.dene Henry S. Streeter 1rdliam F.Glavin George H. md- nopes & Gray George J. Femas N Charmaa, Hemesway k Barnes Eascuam N s'm. dent Xero Corporannon Morris fanenbaum Peer E. Madden N Charman. Ramald A. Cola loba B.Gesy tsacuam N Pmeden tm dent, Dennison Pmedene ATkT Masulacturing company Dsvid 1 Perini YsMaasn L Thurston Devid A, Spi,na Chairman, Pmxiem anJ F_asrum N Pmadens Presidens and Chief Esseusive Charles H. Hood Chnf Esecutm Osure, OGcev GenRmL lac. Pm. dent, Peria Co poemion Bradford i T Che'rs 18, Iteod Foundanno. Phylli.s A. Walla.e 5esuor Vice P . Anhur M. Saciler, M.D. Pro 6cssor. Alind P. Sloan School Charks F. Kaye Imerazional Publuter. of Management, Manachusem Charman of she Board Madaral Tribune Group inmanie of TahacJogy and Chwf Esecutive Oncer, XTRA Corporaison Norton Q, Steen Esecucm N Pmuieni, i t Cabot Corpormion Offito ul State Street Iluston Corporation Corporate Information kate Street Bank State Street B.nk State Street lendon limited Aneual Meeting: and Trust Company laae. national km Sami Home Tk Corporation's annual 225 Franklin kreet JJ Bro d Samt 12/l) Nichulu Lat.e meeting wdl be held on Bonon. Mana huwm 02110 New York. New York 10004 London EC4N 7BM,Ingland Wednesday, April 15.1*tt, as 240 tm. at 225 Franklin Stat, London Branch Sute Str:et Bank and Trust Brummels Brarach somon, Musuhmects. 5saan 5errei Houw Company of California, N.A. !
</n Keriermise- 5t. Quintin ;
12rt) Nuholu t.ame 5tS 5ovah Figurroa semi Transfer Agent: 16-38 Ru. 'esePh il J Landan EC4N 7BN Ent land Los Angeles.Caldarnia goort c40 Brunels, Belgium $ cme kmt Sank
]
Cayman Islands Branch and Trum Company i State Strett Boston State Street Bank Boa 166 P o. Bos 50. { Capital Corporation (SmturtanJ) Boi w, Muuen wit, c2mt C etown. Grand Cayman 225 Franklin Sim, kadelhoicrursue 22 1 B'd' 417 128 5000. Es. 2705 TeuIndwo Boison, Musachuw:ss 01110 u024 Zuruh/5wuzerW Seoch 1.isting: Cge Cod Personal seas,5 ,ng 3 ,,,, State Street GmbH Tk con mo, acck n traded Truss 06cr I 197 North 5 reet Lansing egy, Inc. Monege!as Palms c veroe.cousser on the Naional l 225 Franklin 'arvet Kardin4LFaulhaber.kr 14a Market ty tem. Hyannis, Musahuws s 01601 Bostoa, Manachunes.: 0210 8030 Muncka 2 I N ASDAQ symbol. STliK Feds.31 Republic of Gr.many Florida Represrnestive SSB investzwnes, Inc. General InquirUs: 1200 North Federal Highway 225 Franklin Seri e, State kreet Australs.a kate kreci Bos.on Corpor sion j Sune 200 Boson Manahuints 02tg Limn?d Bus l51 1 Sm a Raton, Horida ))412 Il Clarence %, ret Boston. Massuhments 02Wt ivdney NSW 2NO j Boston Financid Dnea MI')75 m 0
'itsee Street Bank Services, Inc. Auurs' i and Trust Company, N.A. 2 Iwruage Drm Form IOK and Other Reports.
Bimds av Quincy. Mus.nwhunnis 01178 h kreet Asia La.snited W ravoiual epo isoth No Lrk, Nee York 10005 M02. Glomener Tower 'murnies and E> hange )
't, Pedda. 9mi Commen.un i Form iCK).
t l Ceniral addnional copics af this report. ! Hong Kong quaractly reports, and call report s may me obt ained from ik l j Marketing Dmsion. State Screa l Bauon Craporation. Son )St. hoitna. Maum huwii. 0201. ( .47) 654. D8). Financial Irtformation: ' i A nalvvs, saa k holders, and l n=cuors interested .n salamaal finanualinformana,e ma,6all or i weme hanne G Clark. he Preaoent.(617)6544477 I1r s :. ..
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I1 I SECURITIES AND EECHANGE C010 FISSION Vast.ington, D.C. 20549 _
~'
?. . . . _
Form 10-Q AUG 1. :. . i l l 4 w i I QUARTERLY REP 0t? UNDER SECTION 13 or 15(d) l OF THE SECURITIES IICHANGE ACT OF 1934 For the Quarter Ended June 30. 1987 o St0 V Coas.ission File Number 1-44ti STATE STerry 3G;7(,, r=q__sogA7Iog (Exact name cf registrant as specified in its charter) C{- --..ealth of Massachusetts 04-2456637 (Stata or other jurisdiction of incorporation) (I.R.S. Employer Identification Number) 225 Franklin Erreat. Boston. Massachusetts 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone mseber, including area coda (617) 786-3000. 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 it aanths (or for such shorter perciod that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the latt 90 days. YES Z _ 30 Number of shares was 36,430,717. of registrant's cosunon stock outstanding on July 31, 1987 AUG 17 1967 BOChtBll(1f0(mil 600 W Gaithersburg, MWand summmmme==m- ' i
STATE STREET BOSTOR CORPORATION AND SUB8IDIALIES Table of Contents 1 EAlt Part I - Financial Information Consolidated Statements of Condition 1 Consolidated Statements of Income 23 consolidated Statements of Changes in Financial Position 4 Notes to Consolidated Financial Statements 5-9 Report on Review by Independent Public Accountants 10 Management's Discussion and Analysis of Financial Condition and - Results of Operations 11-13 Part II - Other Information Legal Proceedings 14 Changes in Securities 14 Defaults Upon Senior Securities 14 Other Information 14 Exhibits and Reports on Forn 8 K 14 Additional Exhibits 14 j Signatures 15 r i l useri. i _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ - - -
STATE STREET BOST05 CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition
. (Dollars in thousands)
June 30, December 31, ; 1987 1986
' ASSETS (Unaudited) (*)
Cash and due fros banks $ 683.982 $1,323,412 Interest-bearing deposits with banks 1,036,848 1,047,435 Investment securities 1,891,463 1,622,477 Trading account. assets 19,244 33,740 Federal funds sold an/ securities purchased under resr e agreements 713,000 455,000 loans (net of unearne; income of $2,599 and $3,342) 2,131,509 2,169,490 Allowance for loan losses (46.019) Net loans (42.355) 2,085,490 2,127,135 Premises and equipment, net 137,334 131,190 Customers' acceptance liability 207,615 216,852 Accrued income receivable 135,901 111,503 Other assets 151.264 121.074 Total Assets $7,062,141 $7,189,818 LIABILITIES Deposits: Noninterest bearing: Domestic $2,513,362 Toreign $3,382,715 23,877 23,540 Interest bearing: Domestic 1,171,618 Foreign 1,321,887 Total deposits 775.15]. ,,,,,,M1 M 4,484,724 5,26),596 Federal funds purchased 319,390 277,100 Securities sold under repurchase agreements 1,139,473 624,353 Other short term debt 75,523 66,575 Acceptances outstanding 208,197 218,158 Accrued taxes and other expenses ( 112,761 113,592 Other liabilities 161,202 ! long teru debt 92,087 ' 126.050 135.993 Total Liabilities 6,627,320 6,797,454 STOCEBOLDERS' EQUITY Preferred stock, no par: Shares authorized, 3,500,000; none issued ; Common stock, $1 par: i Shares authorized, 56,000,000 l Shares issued, 35,967,000 and 35,078,000 35,967 35,078 i Surplus 47,680 l 38,671 Retained estnings 351.174 318.615 Total Stockholders' Equity 434.821 392.364 J Total Liabilities and Stockholders' Equity $7,062,141 $7,189,818
*From audited financial statements.
See notes to consolidated financial statements. 1 unemmasassumusmanum I
STATE STREET 308705 COILFORATION AND SUBSIDIARIES Consolidated Statements of Income
- Three months ended June 30, (Dollars in thousands, except per share data)
(Unaudited) EFFEREST INCOME 1987 1986 Loans, includin6 fees '
$ 41,118 $ 40,690 4
Investment securities: f ' U.S. Treasury and Federal agencies 23,599 23,000 State and municipal 4,197 Other investments 4,301 i 5,998 3,096 trading account assets i Deposits with banks 393 1,257 1 17,236 17,487 Federal funds sold and securities { purchased under resale agreements 11.480 i Total interest incese 10.343 104,021 100,174 JtFTEREST EXFIESE 1 Deposits 30,085 31,684 short term borrowings 12,627 Long term debt 23,242 Total interest expense . . _2.114 1.421 ; 55.49.6 56.347 Net Interest Income 48,525 43,827 i Provision for loan losses 5.E42 4.373 l Net interest income after j provision for loan losses i 42,683 39,454 OTHER OPERATING IBCOME Fiduciary compensation 56,849 42,330 Bank card fees 5,739 t Other 6,008 J 11.461 11.101 Total other operating income 59.439 Income before other operating expenses .74.041 116,732 98,893 OTHER OPERATING EEFENSES compensation 1 Other personnel costs 40,282 ?5,199 i occupancy, not 6,040 5,658 ' Equipment 6,590 5,486 : Other 7,208 5,752 25.774 20.944 Total other operating expenses 85.894 73.039 Income before income taxes 30,838 Income taxes 25,854 ! Net Income 10.818 9.673
$20,020 $16,181 Earnings per 5 hare:
Primary Pully diluted $ .54 $ .45 1
.51 41 Average Sheres Outstanding (in thousands)
Frimary 36,960 j Pully tituted 36,188 39,713 39.686 Cash dividends decisted per share
$.11 $.09 l
Sea notes to consolidated financial statements. I i i 2 I l
STATE STREET DOSTOR CORPORATION AND StmSIDIARIES Consolidated Statements of Income Six Months Ended June 30, (Dollars in thousands, except per share data) (Unaudited) INTEREST INCout loans, including fees 1987 1986 Investment securities: $82.154 $82,639 U.S. Treasury and Federal agencies 46,018 state and municipal 44,677 Other investments 8,238 8,969 Trading account assets 11,026 5,169 Deposits with banks 834 3,142 34,208 35,383 Federal funds sold and securities purchased under resale agrecuents 26.687 Total interest income _20.657 209,165 200,636 INTEREST EIFITSE Depor,Its Short-term borrowings 59,440 64,382 long-tern debt 43,902 46,248 j Total interest expense 5.688 _ 2.860 109.030 113.490 Net Interest Income 100,135 Provision for loan losses 87,146 11.450 8.541 Net interest income after provision for loan losses 88,605 i 78,605 OTEER OPERATIEG INCOME Fiduciary compensation } Bank card fees 108,472 78,648 Other 11,461 10,923 27.816 .22.641 Total other operating income 147.749 Income before other operating expenses 112.212 236,434 190,817 OTHER OPERATING EIFENSES I Compensation 83,102 67,355 f Other personnel costs Occupancy, not 11,924 10,950 l 14,004 l Equipoent 11,003 ' Other 13,808 10,763 50.841 38.796 Total other operating expenses 173.679 Income before income taxes 138.867 Income taxes 62,755 51,950 Net Income .22.818 19.540
$39,937 $32,410 EARNINGS PER SHARE:
Primary IVily diluted $1.08 $0.90 1.02 0.83 EARNINGS PER SHARE: Primary Ihlly diluted 36,889 36,008 39,715 39,676 Cash dividends declared per share 0.21 0.17 See notes to consolidated financial statements 3
. - I STATE STREIT 308705 CORPORATION AED SUBSDTAaTRS Consolidated Statements of Changes in Financial Position SLs months ended June 30, (Dollars in thousands)
(Unaudited) j j i SOURCE OF FUEDS 1987 1986 From Operations
- Net Income-
$ 39,937 32,410 Provision for loan losses 11,450 Deferred taxes 8,541 Depreciation and amortization 5,191 6,578 7.624 5.892 f
Total funds from Operations 64,202 53,421 Issuance of common stock 9,898 5,494 Incrasse in: s Short-term borrowings other stabilities 566,358 417,094 62,461 Decrease in: Cash and dua from banks Interest bearing deposits with banks 639,430 Trading account assets 10,587 89,333 Loans, not 14,496 113.929 j Total Source of Funds 30.195 114.096 '
$1,397,627 $793,367 USE OF FUNDS Cash dividanda declared Conversions and payments of long term debt $ 7,469 $ 5,878 9,943 3,839 Increase in:
Cash ar.d due from banks - Investment securities 77.134 270,098 202,009 Federal funds sold and se urities purchasad under resale agreements Premises and equipment 258,000 210.013 Other assets 12,620 27,722 54,625 13,857 ' 1 i Decrease in: $ Depostes i other liabilities 784,872 222,480 Total Use of Funds _ 30.431 j f
$1,397,627 $ 793,367
{ See notes to consolidated financial statements.
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NOTES 70 COR80LIDATED FIEANCIAL STATEMElffS (Unaudited) Note A . Basis of Presentation The consolidated financial statements include the accounts of State Street Boston Corporation (" State Street") and its subsidiaries, including its principal subsidiary, State Street Bank and Trust Company. All significant intercompany transactions have been eliminated upon consolidation. State Street's investment in its 50% owned affiliate, Boston Financial Data Services, Inc., is accounted for on the equity method. In the opinion of management, all adjustments consisting of normst recurring accruals which are necessary for a fair presentation of the financial position of State Street at June 30, 1987, and December 31, 1986, and the results of its operations for the three and six month periods ended June 30, 1987 and 1986 have been made. These statements should be read in conjunction with the financial statements, notes and other information included in the Compan/ s latest annual report on form 10.K. Certain amounts have been reclassified to presentation. conform to the 1987 sethod of Average number of shares and per share amounts for prior periods have been restated to reflect the evo.for.one common stock split distributed on August 5, 1986. Note B Investment Securities Investment securities consisted of the following: (Dollars in thousands) June 30. 1987 December 31. 1986 Cost Market Cost Market U.S. Treasury and Federal agencies $1,269,892 $1,265,405 State and municipal $1,046,230 $1,065,117 275,371 275,647 287.354 290,334 Other 346.200 338.159 288.893 288.865
$1,891,463 $1,879,211 $1,622,477 $1,644,316 Note C . Allowance for tonn tesses The adequacy of the allowance for loan losses is evaluated on a regular basis by taanagement.
Factors considered in evaluating the sdequacy 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. 'Ihe provision for loan losses chargsd to operating expense is based upon management's judgement of the amount necessary losses. to maintain the allowance at levels adequate to absorb probable 5 L
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) s Note C Allowance for loan fosses (continug Changes in the allowance for loan losses, includin5 amounts applicable to bank and non bank subsidiaries, for the three and six month periods ended June 30, 1987 and 1986, were as follows: Three Months Ended Six Months Ended (Dollars in thousands) Jung 30. _ June 20. 1987 11Bjlt 1987 seginning Balance 1986
$44,273 $37,917 $42,355 $36,214 Provision for loan losses 5,842 4,373 11,450 8,541 loana charged off (5,046) (4,388) (10,067)
Recoveries previously charged off (8,208) 925 1,092 2,096 2,315 Foreign currency translation 25 .174 185 Ending Balance . 306
$46,019 $39,168 $46,019 $39,168 Note D - Income Tares The proviston for income taxes in the accompanying consolidated statements of income include deferred income taxes arising as a result of reporting certain reporting items purposes. of income and expense in different years for tax and financial deferral method, underInvestment tax credits are accounted for on the which tax benefits are recognized ratably over the lives of the assets acquired. Tax expense of $38,000 and S 71,000 from securities gains and losses, net for the three month periods ending June 30, 1987 and 1986, respectively, and tax expense of $101,000 and $ 84,000 for the six month periods ending June 30, 1987 and 1986, respectively, are included in the provision for income taxes. State Street and its domestic subsidiaries file a consolidated federst income tax return.
The provision for income taxes is comprised og the following for the three month and six month periods ended June 30: Three Months Ended Six Months Ended (Dollars in thousands) June h June 30 1987 1986 _1987 Current .1986
$ 8,349 $7,065 $17,627 $12,962 Deferred 2.469 2.608 _1 111 6.578
$10,818 $9,673 $22,818 $19.540 The provision for income taxes for the three month and six month periods I ended the U.S.June 30, 1987 and 1986 is less than the amounts computed by applying l
Federal income tax rates of 40% and 464 to income before taxes for 1987 and 1986, respectively. This is due primarily to the effects of tax exempt interest income, and the amortization of investment tax credits. These state income reductions taxes. in the provision fer income taxes are partially offset by 6 _ _ - - - - - - > - - - - - - - - - ' ~ - ~ - -
NOTES TO CONS 01JDATED FINANCIAL STATEMEETS (Unaudited) Note E - Other Incona The following items are included in the "other" category ef other operating income 1986: for the three and six month periods ended June 30, 1987 and Three Months Ended Six Months Ended (Dollars in thousands) June 30. June 30. 1987 1986 1987 Service fees _.1986
$ 3,829 $ 3,534 $ 8,244 $ 6,892 Foreign exchange trading 3,172 3.189 8,196 Correspondent service fees 6,570 2,173 2,214 4,275 4,311 Trading gains (losses), not 135 1,089 Securities gains (losses), net (253) 269 106 136 239 other 160 2.046 .2.281 .5.773 4.439
$11.461 $11,101 $27,816 $22,641 l
Note F other Ernenses The following items are included in the 'other" category of other operating expenses for the three and six month periods ended June 30, 1987 and 1986: Three Months Ended Six Months Ended (Dollars in thousands) June 30. June 30.
. ...1981 _ 1986 1212 .. 1986 External contract services $ 5,037 $ 3,907 $10,459 $ 7,558 Postage, stationery and supplies 2,940 2,827 5,749 5,546
)
Telecommunications 2,632 2,161 5,046 ) Professional fees 3,653 i 3.326 2,334 5,739 4,035 Insurance 1,925 1,343 l Advertising and customer contact 4,018 2,697 2,404 2,072 4,385 3,562 Other 7.510 6.300 15.445 11.745
$25,774 $20,944 $50,841 $38,796 l
7 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) hoto C Commitments and Continren ttiabilities The financial statements do not reflect various commitments and contingent ; liabilities which artre in the normal course of business. These include commitments to extend credit, letters of credit,- guarantees and foreign exchange contracts. On April 19, 1983, counsel fer Union National Bank, a subsidiary of State Street which was sold to .The Conifer Group, Inc. on December 30, 1983, received a letter from the Environmental Protection Agency stating the intention of the EPA to make expenditures under the federal so-called
'Superfund" Act toward the cleanup of a site owned by Silresia Chemical Corporation, to which Union had made secured loans from 1970 to 1976. In its letter, the EPA states that under the Act responsible parties may be liable for money expended by the government to take necessary corrective actions at the site and asserted that the EPA had determined Union to be an owner or operator of the site and is therefore a responsible party. Under the "Superfund* Act, an owner or operator may be liable for the total costs of the cleanup of the site and other damages which are indeterminate at this time. Union has denied that it is or ever was an owner or opetator of the site. Under the terms of the agreement relating to the sale of Union, State Street agreed to indemnify The Conifer Group, Inc. for any costs which they may incur in this matter. In the opinion of management, this action can be successfully defended or resolved without sacerial adve: :e effect on the financial position of State Street.
i l 3 _ _ _ _ - - _ _ _ . _. l
MrFES TO CONSOLIDATED FINANCIAL STATEMElffS (Unaudited) Note H - Earninas Per Common Share The computation of earnings per common share is based on the weighted average number of shares of common stock and common stock equivalents outstanding per share is based duringoneach the period. The computation of fully diluted earnings assumption that the convertible capital notes and debetetures had been converted as of the beginning of each year with the elimination of related interest expense less income tax effect. The computation of earnings per share is os follows: (Dollars in thousands, Three Months Ended except per share data) Six Months Ended Juna 30. June 30. 1987 1986 1987 Prim rv 1986 Average shares outstanding 39,960,031 36,187,520 36,889,159 36,008,248 Net income $20,020 $16,181 $39,937 $32,410 Earnings per share .54 .45 1.08 .90 Fully Dilured Aversgo shares outstanding 36,964,934 36,261,400 36,889.276 36,143,816 Assuming conversion of 54 convertible capital notes due 1994 and 7 3/44 convertible subordinated debentures due 2008 2.748.487 3.424.876 2.825.611 .3.532.008 Aversgo shares fully diluted besie 39,713,421 39,686,276 39,714,887 39,675,824 Net income $20,020 $16,181 $39,937 $32,410 Elimination of interest on 54 convertible capital notes due 1994 and 7 3/44 convertible subordinated debentures due 2008 less related income tax effect 267 353
$99 715 Net income on fully diluted basis $20,287 $16,534 $40,536 j
$33,125 )
i Earnings per share .51 41 1.02 .83 9 l l
Ernst&Minney 200 ci.,enden St,rrt Boston, Massachusetts 02116 617/266-2000 To the Stockholders and Board of Directors State Street Boston Corporation Boston, Massachusetts Ve have made a revf ew of the consolidated statement of condition of State i Street Boston Corporation and subsidiaries as of June 30, 1987, and the l consolidated statements of income for the three-month and six-acnth periods ended June 30, 1987 and 1986, and the consolidated statements of changes in financial position for the six-month periods ended June 30, 1987 and 1986, in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of obtaining an understanding of the system for the preparation of interim financial information, applying analytical review procedures to financial data, and making inquiries of persons responsible for financial and accounting natters. It is substantially less in scope than an examination in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the ennsolidated interim financial statements referred to above for them to be in conformity with generally accepted accounting principles. We previously examined, in accordsnce with generally accepted auditing standards, the consolidated statement of condition as of December 31, 1986 (presented herein) and the related consolidated statements of income, changes in stockholders
- eouity and c tanges in financial position for the year then ended (not presented herein); and in our report dated January 13, 1987, we expressed an unqualified opirion on those consolidated financial statements.
d6 ! WlL*ng ERNST&WHINNEy{ l l Boston Massachusetts July 15, 1987 10
i MANAGDENT'S DISCUSSION AND ANALTSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIOES Summaary Second quarter earnings per share were $.51 on a fully diluted basis, up 244 from $ .41 per share in the second quarter of 1986. Net income for the quarter var $20.0 million, up from $16.2 million in 1986's second quarter. The earnings gain resulted primarily froe strong growth in fee ineone, partially offset by increased operating expenses and a higher provision for loan losses. Fee income increased to 60% of taxable equivalent income before 19.14. operating expenses. Return on average stockholders' equity was The following table sets forth the components ef the income statement, with net interest income expressed on a taxable equivalent basis: Condensed Income Statements Taxable equivalent basis (in millions of dollars, except per share data) Three Months Ended June 30 Six Months Ended June 30 lill lilft Change i 1182 11 git Change 1 l Net interest income $55.4 $52.4 $ 3.0 Provision for loan losses 6 $113.5 $105.1 $ 8.3 8 f 5.8 4.4 1.5 34 11.5 8.5 2.9 34 Other operating income 74.0 59.4 14.6 25 147.7 112.2 Other operating expense 35.5 32 ALS 2L2 ILS 18 17L 7 138.9 2L1 25 i { Income before income taxes 37.7 34.4 3.3 10 76.1 69.9 6.2 9 1 Income taxes 10.8 9.7 1.1 22.8 Taxable 12 19.5 3.3 17 equivalent adjustment M M ILl1 (20) ,,,,1L2 18.0 IL21 (26) Net. income $20.0 $16.2 $ 3.8 24 $ 39.9 $ 32.4 $ 7.5 23 Per Share Primary $ .54 $ .45 $ .09 20 $ 1.08 $ .90 $ .18 20 Per Share Fully Diluted .51 .41 l
.10 24 1.02 $ .83 .19 23
($ and 4 change based on dollars in thousands) 11 i
MAR &CEMErf'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIOR AND RESULTS OF OPERATIONS Net Interest Income Taxable equivalent net interest income of $55.4 million was up $3.0 million, or 66 over assets and 1986's second quarter. The toprovement resulted from growth of I liabilities. Noninterest-bearing deposits increesed 144, principally due to the activity and growth in the securities processing businesses. The benefits of balance sheet growth were partially offset by the negative effect of lower interest rates and a narrower spread between interest rates earned and paid. During the six month period ending June 30, taxable equivalent net interest income was. $113.5 million, up $8.3 million or 8% over 1986, for the same rea sore. . Other Operatinn Ineone other operating the second income quarter of $74.0 million, was up $14.6 million or 25% over of' 1986. The largest component of other operating i income, fiduciary compensation, was $56.8 million, up 344. Fiduciary compensation includes fee income from mutual fund, master trust, global custody institutions.and persocal trust services, and from investment management for large dollar Global custody and outual fund services provided particularly increases. Fee income for global custody services ves more than twice that of a you ago as a result of new business and additional assets from current clients. Substantial new business was testalled during the second quarter. Domestic master trust / easter custody ascots rose 22t in the quarter to $133.1 billion, dua in large part to the ! nota 11ation of California State Teachers' Retirement System in early April. Inring the quarter, the number of mutual funds serviced increased by 85, bringiag the total to 978. For the six month period ending June 30, other operating income was $147.7 million , up $35.5 million or 32% over 1986. Fiduciary compensation was
$108.5 million, up 384.
As of June 30, total assets under custody were
$531.2 billion, up from $440.8 billion at year end.
Other Ooerattne F.ruenses Other operating expenses of $85.9 million were up $12.9 million, or 18% over 1986's second quarter. The increase was mainly from additional people, services, computer equipment, and office space supporting business growth. For the 25t, six sonth for the period ending June 30, other operating expenses were up sase reasons. 12 1 l
MARACEMErf'S DISCUSSION AND ANALYSIS OF FINANCIAL C0 EDITION AND RESULTS OF OPERATIOWS Iman Ouality The provision for loan losses charged to income was $5.8 million, an increase of $1.5 million from the second quarter of 1986. Net charge offs credit the durirg cardquarter were $4.1 mill. ion reflecting in part the expansion of the portfolio which began in May of 1985. losses increased to $46.0 million, equal to 2.16% of loans Ih allowance at June for loans , l 30, 1987. Non-performing loans declined to $11.0 million, or .52% of ending loans. ; During the quarter, the company s loans to Chile were sold, reducing the Latin American credit exposure to $10.8 million. The credit quality of State Street's Latin American loans had already been recognized in setting the level of the allowance for loan losses. Accordingly, no special provision was made for IAtin American debt during the second quarter. Iman Ratios _ 1987 1986 Net charge offs 1 12 40 3,, 1 1 to average loans 0.796 0.78% 0.73t 0.584 0.704 0.554 Allowance to ending loans 2.16 2.23 1.95 2.10 2.05 1.95 Non performing loans to ending loans 0.52 0.60 0.43 0.26 0.35 0.35 Canital and Liouldity The Corporation is well capitalized for its current operations and continues to generate capital internally at a high rate. On average during the second quarter of 1987, State street's primary capital ratio increased to 6.7t, which compares favorably with the minimum re6ulatory requirement of 5.5%. In the same period, the Corporation's total capital ratio was 8.11. Equity capital continues to grow primarily from the retention of earnings. In the second quarter of 1987 capital was generated internally at 15.3%. Liquidity is provided from maturing investments, the large portfolio of marketable investments, payments on loans, and through access to borrowed funds and deposits. Money market instruments and investment securities were 63% of average interest earning assets for the second substantial liquidity. quarter, providing i These assets have less credit risk and more marketability than loan assets. The relatively short maturity structure of State Street's assets also enhances its liquidity. 3 j 13
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Part II . Other Inferination j Im mal Proceedtnam Reference is made to Note G to Consolidated Financial Statements on page 7. tha-as in Securitian None Dnfaulta Unen Senior Securities None Other fnforimaeion 'l None Exhthits and llanorts on Form 8.I' No reports om Forn 8K were filed during the quarter. Add {tional Exhibita Exhibit 28 Filed herewith: 28.1 Acknowledgement letter for report on unaudited financial information. , 1 i
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1 i l l 1 I l 4 5 14
-__ ___-__=__--- - -
4 SIGMATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf br the undersigned, thereunto duly autherized. l STATE STREET BOSTON CORPORATION Date: Aunust 12. 1987 By: ' 2A David V. Spina Executive Vice President & Treasurer
/
Date: Aunust 12. l987 By: 4 ^ f r, - ret S. Sc.huette Senior Vice President & Comptroller 15
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(! Ernst&Whinney 200 ci., odo. St, t Boston, Massachusetts 02116 Exhibit 28.1 617/266-2000 State Street Boston Corporation We acknowledge the use of our report on the interim financial statements of State Street Boston Corporation for the interim period ended June 30, 1987, which is incorporated by reference in Registration Statement Number 33-9499 on Form S-3 dated October 24, 1986, in Registration Statement Number 33-2882 on Form S-8 dated January 23, 1236, in Registration Statement Number 2-93157 on Form S-8 dated September 7. L984, in Registration Statement Number 2-88641 on Form S-8 dated December 22, 1983, in Registration Statement Number 2-68698 on Form S-8 dated July 30 L980 and in Post-Ef fective Amendment Number 2 to Registration Statement Number 2-68696 on Form S-8 dated July 26, 1983.
~*stt 4 m.)h<uut ERNST 4 WHLNNEY '
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p i 1 4 l l TRANS UNION LEASING CORPORATION AND SUBSIDIARIES v CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31,1986 AND 1985 with REPORT OF CERTIFIED PUBLIC ACCOUNTANTS 4 h a s'
, A MEMBER OF ARTHUR OUNG INTERNATIONAL Arthur Young s*Ca eDe,4 Telephone: (312) 645-3000 Telex: 190182 The Board of Directors Trans Union Leasing Corporation We have examined the accompanying consolidated balance sheet of Trans Union Leasing Corporation and Subsidiaries at December 31, 1986 and 1985, and the related consolidated statements of opera-tions and retained earnings and changes in financial position for the year then ended. Our examinations were made in l accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the statements mentioned above present fairly the consolidated financial position of Trans Union Leasing Corporation and Subsidiaries at December 31, 1986 and 1985 and the consolidated results of operations and the changes in financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis during the period. I ,' February 28, 1987 f
TRANS UNION LEASING CORPORATION AND SU8SIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS Years ended December 31, 1986 and 1985 (Dollars in thousands) 1986 1985 Earned income on direct financing leases and instalment contracts (Note IC) $ 6,922 12,728 Other operating income: Operating lease rental revenue (Note 1C) 894 568 Gains.on disposition of residuals and on early terminations 911 2,288 Other 1,461 586 Gross operating income 10,188 16,170 Costs and expenses: Interest expense 4,229 5,258 Provision for possible losses (Note 1C) 1,274 23,454 Administrative expense 2,085 1,923 Depreciation expense (Note 1C) 787 896 8,375 31,531 Income (loss) before income taxes 1,813 (15,361) Allocation of income tax provision (benefit) (Note 1D): Current 4,081 5,347 Deferred (3,236) (12,646) 845 ( 7,299) Net income (loss) 968 ( 8,062) Retained earnings at beginning of year 2,201 18,263 Cash dividend - (8,000) Retained earnings at end of year $ 3,169 2,201 See accompanying notes.
TRANS UNION LEASING CORPORATION AND SUB3IDIARIES CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL p0SITION Years ended December 31, 1986 and 1985 (Dollars in thousands) 1986 1985 Source of funds: Operations - Net income (loss) $ 968 (8,062) Provision for losses on leases 1,274 23,454 and instalment contracts Principal repayments on leased equipment and instalment contracts 18,892 26,059 Deferred income taxes recoverable and investment tax credits 856 (4,354) Disposition of equipment at book value 13,349 12,050 Total from operations 35,339 49,147 Proceeds from sale of reconstructed - 24,400 equipment Decrease (increase) in advance to 927 (6,677) affiliates Total sources of funds 36,266 66,870 Use of funds: Dividend paid
- 8,000 Expenditures for leased equipment and instalment contracts 1,862 716 Decrease in notes payable 44,493 28,693 Increasa in cost of reconstructed -
6,112 equipment Decrease in deposits 255 385 Other, net 4,279 4,694 Total uses of funds 50,889 48,600 (Decrease) increase in cash and equivalents (14,623) 18,270 Cash and equivalents at beginning of year 19,671 1,401 Cash and equivalents at end of year $ 5,048 19,671 See accompanying notes.
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! TRANS UNION LEASING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 1. principal accounting policies and related party transactions I A. principles of consolidation and related party transactions:
l Trans Union Leasing Corporation (TULC) is a wholly-owned subsidiary of GL Sub Co., a wholly-owned subsidiary of Marmon Holdings Inc. l (MHI). The accompanying consolidated financial statements include I the accounts of TULC and its wholly-owned subsidiaries (the
" Company"). All significant intercompany accounts and transactions -
of TULC have been eliminated. The Company charged certain finance / lease affiliates $84,000 in both 1986 and 1985 for services provided to such companies. In addition to income taxes (see below), "Due from affiliates" includes non-interest bearing advances made to various affiliated companies. i _The Company also entered into ceveral lease transactions during 1986 l which serviced the sales of affiliates. B. Classification: Certain 1985 items previously included in liabilities have been netted against " total minimum payments to be received from direct financing leases" to conform to the 1986 classification. C. Accounting for leases and instalment contracts: Direct financing leases - The majority of the leases entered into by the Company are classified as direct financing leases. Unearned income at the inception of these leases is equal to the minimum lease payments plus estimated residual values less costs of the equipment. When a lease becomes effective, a portion of this unearned income, equivalent to a " provision for possible losses" and
" initial direct costs," is recognized in income. The l
remainder of unearned income is recognized in income over l the life of the lease based upon the " constant yield"
method or similar methods which generally results in a level rate of return on the net investment. Instalment contracts and operating leases - Instalment contacts are similar to direct financing leases, except that the Company does not retain legal ownership of the equipment or its residual value, and are accounted for ulmilar to direct financing leases. The Company has rewritten certain instalment contracts basing the payment schedule on the lessees' equipment usage. In such situa-tions, the carrying value of the instalment contract is j capitalized as " net investment in operating leases" and is depreciated over the remaining useful life of the equip-ment. Revenues for operating leases are recognized as rentals are billed based on equipment usage or the passage of time. Provision for possible losses - In addition to the loss provisions recorded at the incep-tion of leases, the Company makes periodic provisions for additional losses as deemed appropriate based on manage-ment's review of the portfolio. In 1986, this review resulted in a provision of $1.3 million. In 1985, the changing economic environment of the industries which the Company leased to, coupled with the change in composition of the Company's lease portfolio, caused the Company to make an extensive review of its portfolio resulting in a provision for possible losses of $23.4 million. D. Federal income tax provision (benefit): Deferred income taxes are provided on the difference between taxable and financial statement income or loss resulting from the use of different tax and financial statement accounting methods for lease transactions. For income tax purposes, direct financing leases are accounted for as operating leases, and accordingly, the asset costs are capitalized and depreciated and income is recognized as rentals are billed. In addition, deferred income taxes are recognized on the difference between financial statement and tax depreciation of the Company's assets accounted for as operating leases and certain losses. Investment tax credits are deferred and amortized into income as
" earned income" ($240,000 and $327,000 in 1986 and 1985, respec-tively) over the terms of the leases using the constant yield
v - .. a 4 method. For tax purposes, the credits are used to reduce the Company's tax liability to the extent allowable. The Company is included in MHI's consolidated Federal income tax return. An agreement between the Company and MHI provides that the Company will be reimbursed for investment tax credits and tax 1 deductions utilized in MHI's consolidated income tax return. To the extent that consolidated investment tax credits and tax deductions available exceed those usable in any year, the agreement provides that the allocation of the benerits from such tax credits and deductions among the affiliated group shall be determined at the discretion of MHI. The adjustment to reflect the allocation as .. determined by MHI is recorded as an adjustment to the components of the Company's tax provision in the year that the allocation is made. The tax benefits of all losses recorded by the Company, other than amounts reflected in the consolidated balance sheet as " Deferred income tax.es recoverable," have been allocated to the Company by MHI and the benefit of investment tax credits earned by the Company have l been allocated to the Company by MHI except for $2,494,000, which amount is included in "Due from affiliates" in the 1986 consolidated , , balance sheet. The agreement also provides that MHI will be paid for the Company's Federal income tax liability that is currently payable or deferred, whereupon the Company has no further obligation with respect to the deferred liability. In 1986, certain costs previously charged against financial statement income became deductible for Federal income tax purposes, thereby reducing current Federal income taxes by $1,096,000. A charge equal to this reduction has been included in the deferred income tax amount in the 1986 consolidated statement of operations and " Deferred income taxes recoverable" in the 1986 consolidated balance sheet reflect this reduction resulting from this realized tax benefit. Also, certain timing differences, which produced reductions in prior years' Federal income taxes, reversed in 198G resulting in a provision for current income taxes of $4,332,000. As amounts equal to prior year dI
tax benefits had been paid to M111, as provided for in the agreement discussed above, a like amount was credited to the deferred income tax amount in the 1986 consolidated statement of operations. The Company's effective income tax rate of 46.6% in 1986 and 47.5% in 1985 differs from the 46% statutory rate due primarily to state income taxes net of investment tax credits. As a member of a consolidated Federal income tax group, the Compat.; is contingently liable for the Federal income taxes of the other members of the group.
- 2. Cash and equivalents Cash and cash equivalents at December 31, 1986 and 1985 include $3.0 million and $16.7 million, respectively, of short-term investments carried at cost which approximates market. Interest income of approxielately $1,320,000 and $307,000 was earned in 1986 and 1985, respectively.
- 3. Receivables under direct financing leases and instalment contracts Direct financing leases and instalment contracts receivable at December 31, 1986 are due as follows (dollars in thouse.nds): ,
1987 $26,811 1988 18,848 1989 15,053 1990 8,725 1991 4,549 After 1991 4,728
$78,714
- 4. Notes payable Notes payable at December 31, 1986 and 1985 consisted of the follow-ing (dollars in thousands):
)
l _1986 1985~ f Senior notes.' payable in periodic installments through 1992 with' interest at 105% of prime rate to 10.125%,-(weighted average rate of 9.57% kt December 31, 1986 and 9.50% at December 31, 1985) $11,247 40,240 Senior subordinated notes payable in' periodic
~
1) installments through 1992 with interest at l 9.25% (weighted average rate of 10.57% l at December 31, 1985) 3,000 18,500
]
$14,247 58,740 Annual maturities of notes payable during each of the next five years I ending Deceuber 31 are $3,747,000 in 1987, $2,500,000 in 1988,
$2,500,000-in 1989, $2,500,000 in 1990 and $2,500,000 in 1991.
In July 1986, the Company gave notice of optional prepayment under ; the note payable agreements to all noteholders. As a result, TULC retired $33.4 million of outstanding notes with maturity dates through 1995. No premiums or penalties were paid on retirement. Note payable agreements contain provisions which, among other things, prohibit pledging of certain leased assets, restrict the amount of notes payable, as defined, and limit the payment of dividends and restrict other payments. At December 31, 1986, consolidated retained earnings was not restricted as to dividends. In , addition, the senior subordinated debt agreement specifies that this debt is junior in right of repayment to all senior debt.
- 5. Retirement plans I
The Company participates in a discretionary contribution retireMeat plan sponsored by The Marmon Corporation (a subsidiary of MHI). The retirement expense was $19,701 in 1986 and $8,258 in 1985.
- 6. Lease commitment The Company leases office space under an agreement expiring in 1992.
- The annual base rent ($95,230) is subject to escalation as provided for in the lease. Rental expense for 1986 and 1985 was $123,700 and
$137,151, respectively.
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