<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1996
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
----- -----
Commission File Number 0-26996
INVESTORS FINANCIAL SERVICES CORP.
(Exact name of registrant as specified in its charter)
Delaware 04-3279817
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
89 South Street, P.O. Box 1537, Boston, MA 02205-1537
(Address of principal executive offices, including Zip Code)
(617) 330-6700
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
-- --
As of July 31, 1996, there were 6,013,736 shares of Common Stock
outstanding and 430,576 shares of Class A Common Stock outstanding.
- --------------------------------------------------------------------------------
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX
-----
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3
Consolidated Income Statements (unaudited)
Six months ended June 30, 1995 and 1996 4
Consolidated Income Statements (unaudited)
Three months ended June 30, 1995 and 1996 5
Statements of Stockholder's Equity (unaudited)
Six months ended June 30, 1996 6
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1995 and 1996 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
</TABLE>
2
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1995 1996
<S> <C> <C>
Cash and due from banks $ 21,898,903 $ 26,629,731
Time deposits due from banks 1,000,000 -
Federal funds sold 15,000,000 75,000,000
Securities held to maturity (approximate market values of
$155,685,959 and $361,753,769 at December 31, 1995
and June 30, 1996, respectively) 154,123,901 365,511,655
Securities available for sale 90,819,293 181,094,653
Loans, less allowance for loan losses of $35,000 and
$84,114 at December 31, 1995 and June 30, 1996,
respectively 22,864,216 86,039,636
Accrued interest and fees receivable 10,440,758 14,398,558
Equipment and leasehold improvements, net 3,525,581 5,409,599
Other assets 2,763,661 4,648,899
-------------- --------------
TOTAL ASSETS $322,436,313 $758,732,731
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $122,907,489 $396,864,876
Savings 21,085,503 28,603,218
Time 45,000,000 48,900,000
-------------- --------------
Total deposits 188,992,992 474,368,094
Securities sold under repurchase agreements 74,401,454 217,001,552
Other liabilities 5,620,936 10,489,436
-------------- --------------
Total liabilities 269,015,382 701,859,082
-------------- --------------
STOCKHOLDERS' EQUITY:
Class A common stock 5,935 4,354
Common stock 58,505 60,089
Surplus 54,312,474 54,352,812
Deferred compensation (2,117,787) (1,907,125)
Retained earnings 899,794 4,258,908
Net unrealized gain on securities available for sale 262,010 104,611
-------------- --------------
Total stockholders' equity 53,420,931 56,873,649
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $322,436,313 $758,732,731
============== ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED INCOME STATEMENTS (unaudited)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold $ 129,892 $ 664,027
Other short-term investments 28,665 6,448
Securities held to maturity and available for sale 2,344,619 12,262,637
Loans 613,190 997,928
-------------- --------------
Total interest income 3,116,366 13,931,040
-------------- --------------
Interest expense:
Deposits 356,854 3,070,457
Securities sold under repurchase agreements - 2,695,656
Federal funds purchased 55,827 153,601
Treasury, tax and loan account 11,524 7,493
-------------- --------------
Total interest expense 424,205 5,927,207
-------------- --------------
Net interest income 2,692,161 8,003,833
Provision for loan losses - 49,114
-------------- --------------
Net interest income after provision for loan losses 2,692,161 7,954,719
Noninterest income:
Asset administration fees 24,686,122 26,752,370
Proceeds from assignment of UIT servicing, net 2,572,298 -
Computer service fees 250,018 246,610
Other operating income 36,483 36,284
Gain on sale of investment securities - 6,273
-------------- --------------
Net operating revenue 30,237,082 34,996,256
OPERATING EXPENSES
Compensation of officers and employees 13,872,605 15,289,645
Pension and other employee benefits 2,447,911 2,577,870
Occupancy 2,231,236 2,213,942
Equipment 2,443,272 2,635,769
Insurance 535,820 588,022
Subcustodian fees 1,000,938 1,809,899
Depreciation and amortization 755,535 692,521
Professional fees 837,653 1,029,417
Travel and sales promotion 408,072 493,187
Other operating expenses 1,516,771 2,099,339
-------------- --------------
Total operating expenses 26,049,813 29,429,611
-------------- --------------
INCOME BEFORE INCOME TAXES 4,187,269 5,566,645
INCOME TAXES 1,675,192 2,143,091
-------------- --------------
NET INCOME $ 2,512,077 $ 3,423,554
============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 6,466,098
==============
EARNINGS PER SHARE $0.53
==============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED INCOME STATEMENTS (unaudited)
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold $ 128,975 $ 219,483
Other short-term investments 14,851 -
Securities held to maturity and available for sale 1,135,990 7,166,947
Loans 316,309 579,897
-------------- --------------
Total interest income 1,596,125 7,966,327
-------------- --------------
Interest expense:
Deposits 150,001 2,092,538
Securities sold under repurchase agreements - 1,691,153
Federal funds purchased 55,827 116,002
Treasury, tax and loan account 6,841 4,637
-------------- --------------
Total interest expense 212,669 3,904,330
-------------- --------------
Net interest income 1,383,456 4,061,997
Provision for loan losses - 28,067
-------------- --------------
Net interest income after provision for loan losses 1,383,456 4,033,930
Noninterest income:
Asset administration fees 12,209,410 13,955,006
Proceeds from assignment of UIT servicing, net (10,000) -
Computer service fees 119,738 122,567
Other operating income 14,098 15,941
Gain on securities available for sale - 3,825
-------------- --------------
Net operating revenue 13,716,702 18,131,269
OPERATING EXPENSES:
Compensation of officers and employees 6,955,782 7,852,732
Pension and other employee benefits 1,169,162 1,227,109
Occupancy 1,136,544 1,052,711
Equipment 1,166,141 1,329,389
Insurance 267,711 282,939
Subcustodian fees 497,554 988,084
Depreciation and amortization 346,406 381,651
Professional fees 457,804 475,271
Travel and sales promotion 193,636 293,738
Other operating expenses 671,894 1,028,539
-------------- --------------
Total operating expenses 12,862,634 14,912,163
-------------- --------------
INCOME BEFORE INCOME TAXES 854,068 3,219,106
INCOME TAXES 395,149 1,215,814
-------------- --------------
NET INCOME $ 458,919 $ 2,003,292
============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 6,465,369
==============
EARNINGS PER SHARE $0.31
==============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
Common Common Deferred
Stock Stock Surplus Compensation
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 5,935 58,505 54,312,474 (2,117,787)
Adjustment to costs of stock issuance - - 35,193 -
Conversion of class A to common stock (1,581) 1,581 - -
Amortization of deferred compensation - - - 210,662
Exercise of stock options 3 5,145
Net income - - -
Payment of dividend
Change in net unrealized gain on
securities available for sale - -
------------ ------------ ------------ -----------
BALANCE, JUNE 30, 1996 $ 4,354 $60,089 $ 54,352,812 $(1,907,125)
============ ============ ============ ============
<CAPTION>
Net
Unrealized
Gain on
Investment
Securities
Retained Available
Earnings For Sale Total
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 899,794 262,010 53,420,931
Adjustment to costs of stock issuance - - 35,193
Conversion of class A to common stock - - -
Amortization of deferred compensation 210,662
Exercise of stock options 5,148
Net income 3,423,554 3,423,554
Payment of dividend (64,440) (64,440)
Change in net unrealized gain on
securities available for sale (157,399) (157,399)
------------ ------------ ------------
BALANCE, JUNE 30, 1996 $4,258,908 $104,611 $56,873,649
============ ============ ============
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENT OF CASH FLOW (unaudited)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,512,077 $ 3,423,553
------------ -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 755,535 692,521
Amortization of deferred compensation - 210,662
Provision for loan losses - 49,114
Amortization of premiums on securities, net of accretion of discounts 366,725 1,186,515
Gain on sale of securities available for sale - (6,273)
Loss on disposal of fixed assets - 15,211
Deferred income taxes 104,932
Adjustment to carrying value of interest rate floor contracts 1,057,700 -
Changes in assets and liabilities:
Accrued interest and fees receivable 607,508 (3,957,800)
Other assets (241,344) (1,885,238)
Other liabilities 3,303,569 4,868,500
------------ -------------
Total adjustments 5,849,693 1,278,144
------------ -------------
Net cash provided by operating activities 8,361,770 4,701,697
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for
sale and securities held to maturity 10,747,658 31,022,217
Proceeds from sale of securities available for sale - 15,041,451
Purchases of securities - (349,169,353)
Net decrease in time deposits due from banks - 1,000,000
Net increase in federal funds sold (45,000,000) (60,000,000)
Net increase in loans (144,858) (63,224,534)
Purchases of equipment (886,870) (2,591,750)
------------ -------------
Net cash used for investing activities (35,284,070) (427,921,969)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits 1,883,829 273,957,387
Net increase in time and savings deposits 22,532,944 11,417,715
Net increase in securities sold under repurchase agreements - 142,600,098
Adjustment to costs of stock issuance - 35,192
Proceeds from exercise of stock options - 5,148
Dividends paid - (64,440)
------------ -------------
Net cash provided by financing activities 24,416,773 427,951,100
------------ -------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (2,505,527) 4,730,828
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 7,207,657 21,898,903
------------ -------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 4,702,130 $ 26,629,731
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 442,000 $ 5,420,000
============ =============
Cash paid for income taxes $ 1,438,000 $ 2,915,000
============ =============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE SIX MONTHS AND THE THREE MONTHS ENDED JUNE 30,
1995 AND 1996 IS UNAUDITED)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Investors Financial Services Corp. ("IFSC") provides asset administration
services for the financial services industry through its wholly owned
subsidiary, Investors Bank & Trust Company (the "Bank"). The Bank
provides domestic and global custody, multicurrency accounting,
institutional transfer agency, performance measurement, foreign exchange,
securities lending, and mutual fund administration services to a variety
of financial asset managers, including mutual fund complexes, investment
advisors, banks and insurance companies. IFSC and the Bank are subject
to regulation by the Federal Reserve Board of Governors, the Office of
the Commissioner of Banks of the Commonwealth of Massachusetts and the
Federal Deposit Insurance Corporation.
As used herein, the defined term "the Company" shall mean IFSC together
with the Bank from the date of the share exchange discussed below and
shall mean the Bank prior to that date.
On November 8, 1995, the business operations of the Company were
separated from its former parent, Eaton Vance Corp. ("EVC"), by means of
a tax-free, pro rata distribution of EVC's ownership interest in the
Company to the EVC stockholders (the "Spin-off Transaction"). Immediately
prior to the Spin-off Transaction, all of the stockholders of the Bank
exchanged their 1,000,000 shares of the Bank's common stock for a
combination of 3,418,573 shares of Common Stock and 611,427 shares of
Class A Common Stock ("Class A Stock") of a newly formed bank holding
company formed for the purpose of facilitating the Spin-off Transaction.
For financial reporting purposes, the exchange has been accounted for as
if it occurred on November 1, 1995. Subsequent to the completion of the
Spin-off Transaction, IFSC sold 2,300,000 additional shares of its Common
Stock in an initial public offering at an offering price of $16.50 per
share. The net effect of this transaction was an increase in the
Company's consolidated capital of approximately $34,000,000.
In December 1995, the Company changed its fiscal year end from October 31
to December 31.
2. INTERIM FINANCIAL STATEMENTS
The consolidated interim financial statements of the Company and
consolidated subsidiaries as of June 30, 1996 and for the six-month
periods and the three-month periods ended June 30, 1995 and 1996, have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as permitted by such
rules and regulations. All adjustments, consisting of normal recurring
adjustments, have been included. Management believes that the
disclosures are adequate to present fairly the financial position,
results of operations and cash flows at the dates and for the periods
presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K. Results for
interim periods are not necessarily indicative of those to be expected
for the full fiscal year.
Certain amounts from the prior year have been reclassified to conform to
current year presentation.
8
<PAGE>
3. SECURITIES
Carrying amounts and approximate market values of securities are
summarized as follows as of December 31, 1995:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Approximate
Held to Maturity Value Gains Losses Market Value
<S> <C> <C> <C> <C>
Mortgage-backed securities $144,123,901 $1,562,732 $ 117,924 $145,568,709
Federal Agency securities 10,000,000 117,250 - 10,117,250
------------ ---------- --------- ------------
Total $154,123,901 $1,679,982 $ 117,924 $155,685,959
============ ========== ========= ============
Amortized Unrealized Unrealized Carrying
Available for Sale Cost Gains Losses Value
U.S. Treasury securities $ 50,312,501 $ 346,672 $ 6,673 $ 50,652,500
Mortgage-backed securities 40,070,111 117,667 20,985 40,166,793
------------ ---------- --------- ------------
Total $ 90,382,612 $ 464,339 $ 27,658 $ 90,819,293
============ ========== ========= ============
</TABLE>
Carrying amounts and approximate market values of securities are
summarized as follows as of June 30, 1996:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Approximate
Held to Maturity Value Gains Losses Market Value
<S> <C> <C> <C> <C>
Mortgage-backed securities $350,511,655 $580,178 $3,998,964 $347,092,869
Federal Agency securities 15,000,000 - 339,100 14,660,900
------------ -------- ----------- ------------
Total $365,511,655 $580,178 $4,338,064 $361,753,769
============ ======== =========== ============
Amortized Unrealized Unrealized Carrying
Available for Sale Cost Gains Losses Value
U.S. Treasury securities $ 55,276,365 $116,524 $64,739 $ 55,328,150
Mortgage-backed securities 125,643,936 274,180 151,613 125,766,503
------------ -------- ----------- ------------
Total $180,920,301 $390,704 $216,352 $181,094,653
============ ======== =========== ============
</TABLE>
9
<PAGE>
3. SECURITIES (CONTINUED)
The carrying amounts and approximate market values of securities by
effective maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
Carrying Approximate Carrying Approximate
Held to Maturity Value Market Value Value Market Value
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 10,000,000 $ 9,749,200
Due from one to five years 79,803,891 80,885,330 102,418,578 101,031,179
Due five years up to ten years 68,228,986 68,639,409 204,007,895 202,059,060
Due after ten years 6,091,024 6,161,220 49,085,182 48,914,330
------------ ------------ ------------ ------------
Total $154,123,901 $155,685,959 $365,511,655 $361,753,769
============ ============ ============ ============
<CAPTION>
December 31, 1995 June 30,1996
Amortized Carrying Amortized Carrying
Available for Sale Cost Value Cost Value
<S> <C> <C> <C> <C>
Due within one year $ 25,240,028 $ 25,263,000 $ 25,163,268 $ 25,166,400
Due from one to five years 58,395,211 58,791,503 139,228,936 139,302,575
Due five years up to ten years 6,747,373 6,764,790 16,528,097 16,625,678
------------ ------------ ------------ ------------
Total $ 90,382,612 $ 90,819,293 $180,920,301 $181,094,653
============ ============ ============ ============
</TABLE>
The maturity distributions of mortgage-backed securities have been
allocated over maturity groupings based upon actual pre-payments to date
and anticipated pre-payments based upon historical experience.
Two securities available for sale were sold during the six months ended
June 30, 1996 resulting in gains totaling $6,273.
The carrying value of securities pledged amounted to approximately
$206,000,000 and $298,211,000 at December 31, 1995 and June 30, 1996,
respectively. Securities are pledged primarily to secure public funds and
clearings with other depository institutions.
4. LOANS
Loans consist of demand loans with individuals and not-for-profit
institutions located in the greater Boston, Massachusetts metropolitan
area and loans to mutual fund clients. The loans to mutual funds include
advances pursuant to the terms of the custody agreements between the
Company and those mutual fund clients to facilitate securities
transactions and redemptions. The loans are generally collateralized
with marketable securities. There were no impaired or nonperforming
loans at December 31, 1995 or June 30, 1996. In addition, there have
been no loan charge-offs or recoveries during the six months ended June
30, 1995 and 1996. Loans consisted of the following at December 31, 1995
and June 30, 1996:
10
<PAGE>
4. LOANS (CONTINUED)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
<S> <C> <C>
Loans to individuals $12,610,018 $19,036,974
Loans to not-for-profit institutions 289,198 196,986
Loans to mutual funds 10,000,000 66,889,790
----------- -----------
22,899,216 86,123,750
Less allowance for loan losses 35,000 84,114
----------- -----------
Total $22,864,216 $86,039,636
=========== ===========
</TABLE>
The Company had commitments to lend of approximately $1,708,000 and
$27,339,000 at December 31, 1995 and June 30, 1996, respectively. The
terms of these commitments are similar to the terms of outstanding loans.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The major components of equipment and leasehold improvements are as
follows at December 31, 1995 and June 30, 1996:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
<S> <C> <C>
Furniture, fixtures and equipment $6,281,172 $8,223,227
Leasehold improvements 761,929 596,319
---------- ----------
Total 7,043,101 8,819,546
Less accumulated depreciation and amortization 3,517,520 3,409,947
---------- ----------
Equipment and leasehold improvements, net $3,525,581 $5,409,599
========== ==========
</TABLE>
6. DEPOSITS
Time deposits at December 31, 1995 and June 30, 1996 include
noninterest-bearing amounts of approximately $45,000,000.
All time deposits had a minimum balance of $100,000 and a maturity of
less than three months at December 31, 1995 and June 30, 1996.
7. REPURCHASE AGREEMENTS
The Company enters into repurchase agreements whereby securities are sold
by the Company under agreements to repurchase. The Company had
liabilities under these agreements of $74,401,454 and $217,001,552 at
December 31, 1995 and June 30, 1996 respectively. The interest rate on
the outstanding agreements at December 31, 1995 ranged from 5.5% to 6.0%
and all agreements matured on January 2, 1996. The interest rate on the
outstanding agreements at June 30, 1996 was 5.03% and all agreements
matured on July 1, 1996. The following securities were pledged under
these agreements at December 31, 1995 and June 30, 1996:
11
<PAGE>
7. REPURCHASE AGREEMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
Carrying Approximate Carrying Approximate
Value Market Value Value Market Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $29,345,800 $29,345,800 $ - $ -
Federal Agency securities - - 5,000,000 4,812,500
Mortgage-backed securities 47,211,518 47,254,137 234,306,583 232,332,281
----------- ----------- ------------ ------------
Total $76,557,318 $76,599,937 $239,306,583 $237,144,781
=========== =========== ============ ============
</TABLE>
8. STOCKHOLDERS' EQUITY
On May 27, 1994, the Bank's Board of Directors approved a reduction in
the par value of the Company's common stock from $100 per share to $10
per share, and a 100-for-1 stock split which caused the number of shares
of common stock authorized, issued and outstanding to increase from
10,000 shares to 1,000,000 shares. The stock split resulted in a
$9,000,000 increase in common stock, a $1,000,000 decrease in surplus and
an $8,000,000 decrease in retained earnings. There were no other changes
in authorized, issued or outstanding common stock for any period
presented prior to the Spin-off Transaction.
IFSC has authorized 1,000,000 shares of Preferred Stock, 650,000 shares
of Class A Common Stock and 20,000,000 shares of Common Stock, all with a
par value of $.01 per share. At December 31, 1995 and June 30, 1996,
there were no preferred shares issued or outstanding. There were 593,500
and 435,382 shares of Class A Common Stock and 5,850,500 and 6,008,930
Common Stock issued and outstanding at December 31, 1995 and June 30,
1996, respectively. The Common Stock and Class A Common Stock are
identical except that the Class A Common Stock has ten votes per share
and automatically converts into Common Stock upon transfer and under
certain other circumstances.
The Company has two stock option plans, the 1995 Stock Plan and the 1995
Non-Employee Director Stock Option Plan.
Under the terms of the 1995 Stock Plan, the Company may grant options to
purchase up to a maximum of 560,000 shares of Common Stock to certain
employees, consultants, directors and officers. The options may be
awarded as incentive stock options (employees only), nonqualified stock
options, stock awards or opportunities to make direct purchases of stock.
Under the terms of the 1995 Non-Employee Director Stock Option Plan, the
Company may grant options to non-employee directors to purchase up to a
maximum of 40,000 shares of Common Stock. Options to purchase 2,500
shares of Common Stock were awarded at the date of initial public
offering to each director. Subsequently, any director elected or
appointed after such date will receive an automatic initial grant of
options to purchase 2,500 shares upon becoming a director. Thereafter,
each director will receive an automatic grant of options to purchase
2,500 shares effective upon each one-year anniversary of the date of such
director's original grant. Additionally, in April 1996 the Company's
stockholders approved an amendment to the 1995 Non-Employee Director Plan
that will allow non-employee directors to elect to receive options to
acquire shares of the Company's Common Stock in lieu of such director's
cash retainer. Any election is subject to certain restrictions under the
1995 Non-Employee Director Stock Option Plan. The number of shares of
stock underlying the option is equal to the quotient obtained by dividing
the cash retainer by the value of an option on the date of grant as
determined using the Black-Scholes model.
The exercise price of options under the 1995 Non-Employee Director Stock
Option Plan and the incentive options under the 1995 Stock Plan may not
be less than fair market value at the date of the grant. The exercise
price of the nonqualified options from the 1995 Stock Plan is determined
by the compensation committee of the Board of Directors. All options
become exercisable as specified at the date of the grant.
12
<PAGE>
8. STOCKHOLDERS' EQUITY (CONTINUED)
In November 1995, the Company granted 114,000 shares to certain officers
of the Company under the 1995 Stock Plan. Of these grants, 105,000 shares
vest in sixty equal monthly installments, and the remainder vest in five
equal annual installments. Upon termination of employment, the Company
has the right to repurchase all unvested shares at a price equal to the
fair market value at the date of the grant. The Company has recorded
deferred compensation of $2,117,787 and $1,907,125 at December 31, 1995
and June 30, 1996, respectively, pursuant to these grants.
A summary of option activity under all plans is as follows:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
<S> <C> <C>
Outstanding at December 31, 1995 211,500 $16.50
Granted 7,500 $22.375 - $22.625
Exercised (312) $16.50
Expired (2,188) $16.50
----------
Outstanding at June 30, 1996 216,500
==========
Exercisable at June 30, 1996 25,990
----------
</TABLE>
Under Massachusetts law, trust companies such as the Bank may only pay
dividends out of "net profits" and only to the extent that such payments
will not impair the Bank's capital stock and surplus account. If, prior
to declaration of a dividend, the Bank's capital stock and surplus
accounts do not equal at least 10% of its deposit liabilities, then prior
to the payment of the dividend, the Bank must transfer from net profits
to its surplus account the amount required to make its surplus account
equal to either (i) together with capital stock, 10% of deposit
liabilities, or (ii) subject to certain adjustments, 100% of capital
stock. The Bank and IFSC are required to maintain minimum amounts of
capital to total "risk-weighted" assets, as defined by the banking
regulators. At June 30, 1996, the Bank and IFSC are required to have
minimum Tier 1 and total capital ratios of 3% and 8%, respectively. The
actual ratios at that date were in excess of all regulatory requirements.
9. PROCEEDS FROM ASSIGNMENT OF UNIT INVESTMENT TRUST SERVICING, NET
During the first six months of 1995, the Company recognized a net gain of
$2,572,298 of noninterest income resulting from the assignment to another
company of the rights to service approximately $5.0 billion of unit
investment trust assets. In connection with the assignment, the Company
adjusted to market value interest rate floors with a notional amount of
$80,000,000, and the resulting loss of $1,057,700 is reported net of the
cash proceeds from the assignment of unit investment trust servicing.
These interest rate floors had previously been designated as hedges of
fees from the unit investment trusts (see Note 10).
10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Lines of Credit - At June 30, 1996, the Company had commitments to
individuals under collateralized open lines of credit totaling
$51,855,000, against which $24,516,000 in loans was drawn. The credit
risk involved in issuing lines of credit is essentially the same as that
involved in extending loan facilities. The Company does not anticipate
any loss as a result of these lines of credit.
Interest-Rate Contracts - The following table summarizes the contractual
or notional amounts of derivative financial instruments held by the
Company at June 30:
Interest rate contracts:
Swap agreements $60,000,000
Floor contracts $80,000,000
Interest rate contracts involve an agreement with a counterparty to
exchange cash flows based on an underlying interest rate index. An
interest rate floor is a contract purchased from a counterparty which
specifies a minimum interest rate for the specified period of time. A
swap agreement involves the exchange of a series of interest payments,
either at a fixed or variable rate, based upon the notional amount
without the exchange of the underlying principal amount. The Company's
exposure from these interest rate contracts results from the possibility
that one party may default on its contractual obligation. Credit risk is
13
<PAGE>
limited to the positive market value of the derivative financial
instrument, which is significantly less than the notional value. The
positive market value of the interest rate contracts was $10,352 at June
30, 1996.
11. COMMITMENTS AND CONTINGENCIES
Restrictions on Cash Balances - The Company is required to maintain
certain average cash reserve balances with the Federal Reserve Bank. The
reserve balance requirement as of June 30, 1996 was $26,866,000. In
addition, other cash balances in the amount of $1,392,000 were pledged to
secure clearings with a depository institution as of June 30, 1996.
Lease Commitments - Minimum future commitments on noncancelable operating
leases at June 30, 1996 were as follows:
<TABLE>
<CAPTION>
Bank
Fiscal Year Ending Premises Equipment
<S> <C> <C>
1996 1,933,114 528,642
1997 4,010,216 565,505
1998 4,252,481 245,222
1999 4,252,481 61,480
2000 and beyond 31,168,722 --
</TABLE>
Total rent expense was $2,863,000 and $2,943,000 for the six months ended
June 30, 1995 and 1996, respectively.
Contingencies - The Company provides domestic and global custody,
multicurrency accounting, institutional transfer agency, performance
measurement, foreign exchange, securities lending and mutual fund
administration services to a variety of financial asset managers,
including mutual fund complexes, investment advisors, banks and insurance
companies. Assets under custody and management, held by the Company in a
fiduciary capacity, are not included in the consolidated balance sheets
since such items are not assets of the Company. Management conducts
regular reviews of its fiduciary responsibilities and considers the
results in preparing its consolidated financial statements. In the
opinion of management, there are no contingent liabilities at June 30,
1996 that are material to the consolidated financial position or results
of operations of the Company.
12. FOREIGN EXCHANGE CONTRACTS
The Company enters into foreign exchange contracts with clients and
simultaneously enters into a matched position with another bank. These
contracts are subject to market value fluctuations in foreign currencies.
Gains and losses from such fluctuations are netted and recorded as an
adjustment of asset administration fees. A summary of foreign exchange
contracts outstanding at December 31, 1995 and June 30, 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
------------------------------------- --------------------------------------
Unrealized Unrealized
Currency Purchases Sales Gain/Loss Purchases Sales Gain/Loss
<S> <C> <C> <C> <C> <C> <C>
Germany (Mark) $ 955 $ 955 -- $ 10,474 $ 10,474 --
France (Franc) 859 859 -- 10,176 10,176 --
Switzerland (Franc) 8 8 -- 1,281 1,281 --
Japan (Yen) 46,211 46,211 -- 45,316 45,316 --
Malaysia (Ringgit) 505 505 -- 2,040 2,040 --
Belgian (Franc) 715 715 -- 800 800 --
Netherlands (Guilder) 1,797 1,797 -- 876 876 --
Britain (Pound) 111 111 -- 2,555 2,555 --
Hong Kong (Dollar) 1,991 1,991 -- 1,220 1,220 --
Portugal (Escudo) -- -- -- 689 689 --
Thailand (Baht) -- -- -- 1,672 1,672 --
Sweden (Krona) -- -- -- 1,405 1,405 --
Other currencies 1,034 1,034 -- 2,307 2,307 --
----------- ----------- ----------- ----------- ----------- -----------
$ 54,186 $ 54,186 -- $ 80,811 $ 80,811 --
=========== ========== =========== =========== =========== ===========
</TABLE>
14
<PAGE>
12. FOREIGN EXCHANGE CONTRACTS (CONTINUED)
The maturity of contracts outstanding as of June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Maturity Purchases Sales
<S> <C> <C>
July 1996 $70,090 $70,090
August 1996 6,200 6,200
October 1996 521 521
January 1997 2,500 2,500
February 1997 1,500 1,500
</TABLE>
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
Company's Consolidated Financial Statements and related notes, which are
included elsewhere in this Report. The Company, through its wholly owned
subsidiary, Investors Bank & Trust Company, provides domestic and global
custody, multicurrency accounting, institutional transfer agency, performance
measurement, foreign exchange, securities lending and mutual fund administration
services to a variety of financial asset managers, including mutual fund
complexes, investment advisors, banks and insurance companies. Currently, the
Company provides financial asset administration services for assets totaling
approximately $108 billion, including approximately $8 billion of foreign
assets. The Company also engages in private banking transactions, including
secured lending and deposit accounts.
The Company's historical business and financial results have been
significantly influenced by the restrictions imposed under the Competitive
Equality Banking Act of 1987 ("CEBA"). Under the CEBA restrictions, the Company
could not: (a) engage in any activity in which it was not engaged as of March 5,
1987; (b) increase its assets by more than 7% during any 12-month period
beginning after August 10, 1988; (c) engage in certain cross-marketing
activities with affiliates; or (d) permit overdrafts by or incur overdrafts on
behalf of affiliates at a Federal Reserve Bank. As a result of the Company's
initial public offering completed on November 14, 1995 (the "Offering") and the
distribution by Eaton Vance Corp. ("Eaton Vance") of all its shares of the
Company's Common Stock and Class A Common Stock to the shareholders of Eaton
Vance (the "Spin-Off Transaction"), the Company is no longer subject to such
restrictions. Accordingly, the Company's historical operating results may not
necessarily be indicative of either the full scope of the future conduct of its
business or its future operating results.
The Company is now able to expand current business activities and
participate in certain additional business activities which may result in
increased revenues generated by an increase in client deposits and lending
opportunities. The Company's clients typically generate cash balances from
securities sales and other transactions which they seek to invest on a short-
term basis. Because the Company had been subject to the CEBA 7% annual asset
growth cap, it was not able to accept those deposits prior to the completion of
the Spin-Off Transaction and directed them to other financial institutions,
foregoing a potential source of revenue. The Company directed client deposits
averaging approximately $1.2 billion daily to other financial institutions in
fiscal year ended October 31, 1995. Since the completion of the Spin-Off
Transaction and the Offering, the Company has redirected an average of
approximately $360 million daily of these balances into its own deposit
products. Similarly, many of the Company's clients use credit lines to leverage
their portfolios or to handle overnight cash shortfalls. CEBA requirements
restricted the Company from making commercial loans of this type. As a result of
the removal of CEBA limitations, the Company is now able to make commercial
loans. In December 1995, the Company entered into an agreement to provide a $10
million secured line of credit to a client for a term of five years and in April
1996, the Company entered into an agreement to provide a $20 million umbrella
line of credit to several mutual fund clients managed by one investment advisor.
In addition, the Company makes fully secured advances to certain mutual fund
clients pursuant to the terms of the custody agreements between the Company and
those mutual fund clients.
The Company derives its revenues from financial asset administration
services and private banking transactions. Although interest income and
noninterest income are reported separately for financial statement presentation
purposes, the Company's clients view the pricing of the Company's asset
administration and banking service offerings on a bundled basis. In establishing
a fee structure for a specific client, management analyzes the expected revenue
and related expenses, as opposed to separately analyzing fee income and interest
income and related expenses for each from such relationship. Accordingly,
management believes net operating revenue (net interest income plus noninterest
income) and net income are meaningful measures of financial results. Revenue
generated from asset administration and other fees and interest income increased
16% from $30,237,000 in the first six months of 1995 to $34,996,000 in the first
six months of 1996.
Noninterest income consists primarily of fees for financial asset
administration and is principally derived from custody, multicurrency
accounting, transfer agency and administration services for financial asset
managers and the
16
<PAGE>
assets they control. The Company's clients pay fees based on the volume of
assets under custody, the number of securities held and portfolio transactions,
income collected and whether other value-added services such as foreign
exchange, securities lending and performance measurement are needed. Asset-based
fees are usually charged on a sliding scale. As such, when the assets in a
portfolio under custody grow as a result of changes in market values or cash
inflows, the Company's fees may be a smaller percentage of those assets. Fees
for individually managed accounts, such as custodial, trust and portfolio
accounting services for individuals, investment advisors, private trustees,
financial planners, other banks and fiduciaries, and other institutions are also
included in noninterest income.
Net interest income represents the difference between income generated
from interest-earning assets and expense on interest-bearing liabilities.
Interest-bearing liabilities are generated by the Company's clients who, in the
course of their financial asset management, generate cash balances which they
deposit on a short-term basis with the Company. The Company invests these cash
balances and remits a portion of the earnings on these investments to its
clients. The Company's share of earnings from these investments is viewed as
part of the total package of compensation paid to the Company from its clients
for performing asset administration services.
The Company, because it is no longer subject to the CEBA balance sheet
growth restrictions, is able to accept client deposits it had historically
directed to other financial institutions. As compensation for directing these
deposits to other financial institutions, the Company had retained a portion of
the earnings on the deposits; this amount was recognized as fee income.
Generally, the Company now invests these deposits on its own behalf in various
interest-earning assets and pays interest expense on those deposits. As a
result, the mix of fee income and interest income that comprise the total
compensation package from clients is shifting as the relative amount of fee
income decreases while the relative amount of interest income increases.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q) may contain statements which are
not historical facts, so-called "forward-looking statements," and which involve
risks and uncertainties. The Company's actual future results may differ
significantly from those stated in any forward-looking statements. Factors that
may cause such differences include, but are not limited to, the factors
discussed below. Each of these factors, and others, are discussed from time to
time in the Company's filings with the Securities and Exchange Commission.
The Company's future results may be subject to substantial risks and
uncertainties. Because certain fees charged by the Company for its services are
based on the market values of assets processed, such fees and the Company's
quarterly and annual operating results are sensitive to changes in interest
rates, declines in stock market values, and investors seeking alternatives to
investment offerings of the Company's clients. Also, the Company's interest-
related services, along with the market value of the Company's investments, may
be adversely affected by rapid changes in interest rates. In addition, many of
the Company's client engagements are, and in the future are likely to continue
to be, terminable upon 60 days notice. Also, the Company relies on certain
intellectual property protections to preserve its intellectual property rights.
Any invalidation of the Company's intellectual property rights or lengthy and
expensive defense of those rights could have a material adverse affect on the
Company. The segment of the financial services industry in which the Company is
engaged is extremely competitive. Certain current and potential competitors of
the Company are more established and benefit from greater market recognition and
have substantially greater financial, development and marketing resources than
the Company.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially adversely affect revenues and
profitability, including: the timing of the commencement or termination of
client engagements, the rate of net inflows and outflows of investor funds in
the debt and equity-based investment vehicles offered by the Company's clients,
the introduction and market acceptance of new services by the Company and
changes or anticipated changes in economic conditions. Because the Company's
operating expenses are relatively fixed, any unanticipated shortfall in revenues
in a quarter may have an adverse impact on the Company's results of operations
for that quarter. As a result of the foregoing and other factors, the Company
may experience material fluctuations in future operating results on a quarterly
or annual basis which could materially and adversely affect its business,
financial condition, operating results and stock price.
17
<PAGE>
Statement of Operations
Comparison of Operating Results for the Six Months Ended June 30, 1996 and 1995
Noninterest Income
Noninterest income decreased $503,000 to $27,042,000 for the six months
ended June 30, 1996 from $27,545,000 for the prior period. Noninterest income
consists of the following items:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
--------------------------------- --------
1995 1996 Change
---------------- -------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $24,686 $26,753 8 %
Proceeds from assignment of UIT
servicing, net 2,572 -- --
Computer service fees 250 247 1
Other operating income 37 36 (3)
Gain on sale of investment security -- 6 --
---------------- --------------
Total Noninterest Income $27,545 $27,042 (2) %
================ ==============
</TABLE>
Asset administration fees increased due principally to higher levels of
assets processed. Assets processed is the total dollar value of financial assets
on the reported date for which the Company provides one or more of the following
services: custody, multicurrency accounting, institutional transfer agency,
performance measurement, foreign exchange, securities lending and mutual fund
administration. Total assets processed increased to $108 billion at June 30,
1996 from $82 billion at June 30, 1995. Of the $26 billion net increase in
assets processed from June 30, 1995 to June 30, 1996, approximately 13% of the
increase reflects assets processed for new clients, and the remainder of the
increase reflects growth of assets processed for existing clients and improved
methods for tracking the amount of assets processed, offset in part by the
assets of clients no longer serviced by the Company. The remainder of the growth
in asset administration fees was due to the net expansion of relationships with
existing clients and increased use of the Company's cash management and foreign
exchange services. In addition, because the Company is now able to accept
deposits that had been historically directed to other financial institutions due
to CEBA asset growth restrictions, the Company has experienced a shift in the
mix of compensation received from its clients. See "Overview" in this Item 2. A
larger portion of the Company's compensation from clients is now in the form of
interest income generated from client deposits, resulting in a decrease to asset
administration fees and a related increase in net interest income. The growth in
asset administration fees was also offset by the transfer of unit investment
trust assets discussed below. The administration of these assets accounted for
approximately $1,491,000 in asset administration fees in the six months ended
June 30, 1995.
Unit investment trust ("UIT") assets processed by the Company have
decreased over the last five years, a reflection of declining investor demand
for this type of unmanaged investment product. Declining asset levels led one
client, Merrill Lynch, to consolidate its asset administration service
providers, and it agreed, effective March 1, 1995, to pay the Company to assign
the Company's servicing rights to the Bank of New York Company, Inc. The Company
recognized proceeds of $2,572,000, net of expenses, resulting from the
assignment of the rights to service approximately $5 billion of the client's
unit investment trust assets. The Company has made the strategic decision to
focus its marketing and processing efforts on mutual funds and other pooled
investments which typically experience higher growth in asset levels and can
utilize a wider variety of services provided by the Company, as compared to unit
investment trusts. See Note 9 of Notes to Condensed Consolidated Financial
Statements.
Computer services fees consist of amounts charged by the Company to
Eaton Vance for data processing services related to individual accounts managed
by Eaton Vance. Other operating income consists of miscellaneous private banking
fees for safe deposit and checking account services.
18
<PAGE>
Operating Expenses
Total operating expenses increased by $3,380,000 to $29,430,000 for the
six months ended June 30, 1996 compared to $26,050,000 for the six months ended
June 30, 1995. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the six months ended June 30,
----------------------------------- -----------
1995 1996 Change
-------------- -------------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation $13,873 $15,290 10 %
Pension and other employee benefits 2,448 2,578 5
Occupancy 2,231 2,214 (1)
Equipment 2,443 2,636 8
Insurance 536 588 10
Subcustodian Fees 1,001 1,810 81
Depreciation and amortization 755 693 (8)
Professional Fees 838 1,029 23
Travel and sales promotion 408 493 21
Other operating expenses 1,517 2,099 38
------------- ------------
Total Noninterest Income $26,050 $29,430 13 %
============= ============
</TABLE>
Compensation of officers and employees increased by $1,417,000 or 10%
from period to period due to several factors. The number of employees increased
6% to 729 at June 30, 1996 from 689 at June 30, 1995. In addition, compensation
expense related to the Company's management incentive plan increased because of
the increase in earnings subject to incentive in the first six months of 1996
compared to the first six months of 1995. The remainder of the increase in
compensation expense resulted from salary increases.
Insurance expense increased $52,000 to $588,000 for the six months
ended June 30, 1996 from $536,000 for the six months ended June 30, 1995. The
increase was attributable to increased directors and officers liability
insurance coverage after the Company's initial public offering.
Subcustodian expense consists of fees paid to centralized clearinghouses
and depositories for settling and holding securities on the Company's behalf.
This expense increased $809,000 to $1,810,000 for the six months ended
June 30, 1996 from $1,001,000 for the six months ended June 30, 1995. This
increase results from the increase in foreign assets processed, which are
subject to higher subcustodian fees, from $6.1 billion at June 30, 1995 to $8.0
billion at June 30, 1996, and from the movement by clients into emerging markets
with higher cost structures.
Professional fees increased $191,000 to $1,029,000 for the six months
ended June 30, 1995 from $838,000 for the six months ended June 30, 1995. This
increase was due to the Company's initial compliance with year-end related
filings with the Securities and Exchange Commission and the change of the
Company's fiscal year. The Company has hired general counsel to, among other
things, assist with these reporting requirements in the future.
Travel and sales promotion expense consists of expenses incurred by the
sales force, client management staff and other employees in connection with
making sales calls on potential clients, traveling to existing client sites and
the Company's foreign subsidiaries, and attending industry conferences. This
expense increased $85,000 to $493,000 for the six months ended June 30, 1996
from $408,000 for the six months ended June 30, 1995 due primarily to increased
travel to the foreign subsidiaries.
Other operating expenses increased $582,000 to $2,099,000 for the six
months ended June 30, 1996 from $1,517,000 for the six months ended
June 30, 1995. Other operating expenses include fees for daily market pricing
data, telephone, office supplies, and Delaware excise tax. Fees for daily market
pricing data vary with the level of assets processed. Other expenses such as
telephone and office supplies vary with staffing levels. The Delaware excise tax
is based on the Company's assets. This tax was imposed on the Company after its
formation as a Delaware
19
<PAGE>
corporation in June 1995 and accounts for $132,000 of the increase between
periods. The remainder of the increase relates to the increases in assets
processed and staffing levels.
Net Interest Income
Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities or changes in
interest rates for the six months ended June 30, 1996 compared to the same
period in 1995.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
-------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets
Fed funds sold and
interest-earning deposits $ 528 $ (17) $ 511
Investment securities 9,691 228 9,919
Loans 501 (116) 385
-------- -------- ---------
Total interest-earning assets 10,720 95 10,815
-------- -------- ---------
Interest-bearing liabilities
Deposits 2,603 110 2,713
Borrowings 2,804 (14) 2,790
-------- -------- ---------
Total interest-bearing liabilities 5,407 96 5,503
-------- -------- ---------
Change in net interest income $ 5,313 $ (1) $ 5,312
======== ======== =========
</TABLE>
Net interest income increased $5,312,000 or 197% to $8,004,000 for the
six months ended June 30, 1996 from $2,692,000 for the same period in 1995. This
net increase resulted from an increase in interest income of $10,815,000 offset
by an increase in interest expense of $5,503,000. The net impact of the above
changes was a 182 basis point decrease in net interest margin.
The increase in interest income resulted primarily from a higher level
of interest earning assets. Prior to the Spin-Off Transaction, the Company was
subject to a 7% annual asset growth cap under CEBA. The elimination of the CEBA
growth restriction has allowed the Company to accept deposits from clients which
it had historically directed to other financial institutions. The Company's
average assets for the six months ended June 30, 1996 increased $367,068,000 or
312% compared to the same period in 1995. This growth primarily resulted from an
increase in average interest earning assets of $343,878,000.
Interest expense increased $5,503,000 due to the higher level of
deposits and an increase in the interest rate paid by the Company. Prior to the
Spin-off Transaction, the Company was not trying to attract deposits to its
balance sheet and therefore did not pay a competitive interest rate. The average
rate paid on deposits and short-term borrowings increased from 3.25% to 4.75%
during the period.
Income Taxes
The Company's earnings were taxed on the federal level at 34% for the
1996 and 1995 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly-owned subsidiary, were
assessed at the tax rate for Massachusetts securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts banks of 12.54%. The provision for income taxes
for the six months ended June 30, 1996 increased by $468,000 over the same
period in 1995. The overall effective tax rate decreased to 38.5% for the six
months ended June 30, 1996, from 40% for the same period in 1995. The decrease
in the effective tax rate is due to a decrease in the income of the Company's
Canadian subsidiary, which
20
<PAGE>
were taxed at the Canadian effective rate of 45.37%, and the related increase in
the income of the Company's subsidiaries in Dublin and the Cayman Islands, which
are lower tax jurisdictions, as the Company transferred certain offshore
processing activities from Toronto to Dublin and the Cayman Islands.
Comparison of Operating Results for the Quarters Ended June 30, 1996 and 1995
Noninterest Income
Noninterest income increased $1,764,000 to $14,097,000 for the quarter
ended June 30, 1996 from $12,333,000 for the prior period. Noninterest income
consists of the following items:
<TABLE>
<CAPTION>
For the Quarters Ended June 30,
---------------------------------- ----------------
1995 1996 Change
---------------- --------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $12,209 $13,955 14 %
Proceeds from assignment of UIT
servicing, net (10) - -
Computer service fees 120 122 2
Other operating income 14 16 14
Gain on sale of investment security - 4 -
---------------- ----------
Total Noninterest Income $12,333 $14,097 14 %
================ ==========
</TABLE>
Asset administration fees increased due principally to higher levels of
assets processed. The remainder of the growth in asset administration fees was
due to the net expansion of relationships with existing clients and increased
use of the Company's foreign exchange services.
In the quarter ended June 30, 1995, the Company accrued an additional
$10,000 of expenses related to the assignment, discussed above, of the rights to
service approximately $5 billion of a client's unit investment trust assets
during the quarter ended March 31, 1995.
Operating Expenses
Total operating expenses increased by $2,049,000 to $14,912,000 for the
quarter ended June 30, 1996 compared to $12,863,000 for the quarter ended
June 30, 1995. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the quarter ended June 30,
---------------------------------- -----------
1995 1996 Change
----------------- -------------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation $6,956 $7,853 13 %
Pension and other employee benefits 1,169 1,227 5
Occupancy 1,137 1,053 (7)
Equipment 1,166 1,329 14
Insurance 268 283 6
Subcustodian Fees 497 988 99
Depreciation and amortization 346 382 10
Professional Fees 458 475 4
Travel and sales promotion 194 294 52
Other operating expenses 672 1,028 53
---------------- -----------
Total Noninterest Income $12,863 $14,912 16 %
================ ===========
</TABLE>
21
<PAGE>
Compensation of officers and employees increased by $897,000 or 13% from
quarter to quarter due to several factors. The number of employees increased 6%
to 729 at June 30, 1996 from 689 at June 30, 1995. In addition, compensation
expense related to the Company's management incentive plan increased because of
the increase in earnings in the second quarter of 1996 compared to the second
quarter of 1995. The remainder of the increase in compensation expense resulted
from salary increases.
Equipment expense consists of operating lease payments for
microcomputers, and fees charged by EDS for processing and data storage services
provided to the Company. These expenses vary with the level of assets processed
by the Company. The $163,000 increase between periods is due principally to the
growth in assets processed.
Subcustodian expense increased $491,000 to $988,000 for the quarter
ended June 30, 1996 from $497,000 for the quarter ended June 30, 1995. This
increase results from the increase in foreign assets processed, which are
subject to higher subcustodian fees, from $6.1 billion at June 30, 1995 to $8
billion at June 30, 1996, and from the movement by clients into emerging markets
with higher cost structures.
Depreciation and amortization expense increased $36,000 between periods
due to purchases of furniture, equipment, and capitalized software in late 1995
and in 1996.
Travel and sales promotion expense increased $100,000 to $294,000 for
the quarter ended June 30, 1996 from $194,000 for the quarter ended
June 30, 1995 due to increased travel to the foreign subsidiaries.
Other operating expenses increased $356,000 to $1,028,000 for the
quarter ended June 30, 1996 from $672,000 for the quarter ended June 30, 1995.
Fees for daily market pricing data vary with the level of assets processed.
Other expenses such as telephone and office supplies vary with staffing levels.
The Delaware excise tax is based on the Company's assets and accounts for
$87,000 of the increase between periods. The remainder of the increase relates
to the increases in assets processed and staffing levels.
Net Interest Income
Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities or changes in
interest rates for the quarter ended June 30, 1996 compared to the same period
in 1995.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
--------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets
Fed funds sold and
interest-earning deposits $ 89 $ (13) $ 76
Investment securities 5,953 78 6,031
Loans 326 (63) 263
------- ------- --------
Total interest-earning assets 6,368 2 6,370
------- ------- --------
Interest-bearing liabilities
Deposits 1,960 (17) 1,943
Borrowings 1,761 (13) 1,748
------- ------- --------
Total interest-bearing liabilities 3,721 (30) 3,691
------- ------- --------
Change in net interest income $ 2,647 $ 32 $ 2,679
======= ======= ========
</TABLE>
22
<PAGE>
Net interest income increased $2,679,000 or 194% to $4,062,000 for the
quarter ended June 30, 1996 from $1,383,000 for the same period in 1995. This
net increase resulted from an increase in interest income of $6,370,000 offset
by an increase in interest expense of $3,691,000. The net impact of the above
changes was a 237 basis point decrease in net interest margin.
The increase in interest income resulted primarily from a higher level
of interest earning assets. As discussed above, the elimination of the CEBA
asset growth restriction has allowed the Company to accept deposits from clients
which it had historically directed to other financial institutions. The
Company's average assets for the quarter ended June 30, 1996 increased
$444,000,000 or 366% compared to the same period in 1995. This growth primarily
resulted from an increase in average interest earning assets of $418,000,000.
Interest expense increased $3,691,000 due to the higher level of
deposits and an increase in the interest rate paid by the Company. Prior to the
Spin-off Transaction, the Company was not trying to attract deposits to its
balance sheet and therefore did not pay a competitive interest rate. The average
rate paid on deposits and short-term borrowings increased from 4.5% to 4.79%
during the period.
Income Taxes
The Company's earnings were taxed on the federal level at 34% for the
1996 and 1995 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly-owned subsidiary, were
assessed at the tax rate for Massachusetts securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts banks of 12.54%. The provision for income taxes
for the quarter ended June 30, 1996 increased by $821,000 over the same period
in 1995. The overall effective tax rate decreased to 38% for the quarter ended
June 30, 1996, from 46% for the same period in 1995. Six percent of the decrease
in the effective tax rate is due to the timing of the recognition of tax expense
in 1995; the overall effective tax rate in 1995 was 40%. The remainder of the
decrease is due to the decrease in the income of the Company's Canadian
subsidiary, which were taxed at the Canadian effective rate of 45.37% and the
related increase in the income of the Company's subsidiaries in Dublin and the
Cayman Islands, which are lower tax jurisdictions, as the Company transferred
certain offshore processing activities from Toronto to Dublin and the Cayman
Islands.
Financial Condition
Investment Portfolio
The following table summarizes the Company's investment portfolio for the dates
indicated:
<TABLE>
<CAPTION>
December 31, June 30,
-------------- -------------
1995 1996
-------------- -------------
(Dollars in thousands)
<S> <C> <C>
Securities held to maturity:
Mortgage-backed securities $ 144,124 $ 350,512
Federal Agency securities 10,000 15,000
-------------- -------------
Total securities held to maturity $ 154,124 $ 365,512
============== =============
Securities available for resale:
U.S. Treasury securities $ 50,652 $ 55,328
Mortgage-backed securities 40,167 125,767
-------------- -------------
Total securities available for resale $ 90,819 $ 181,095
============== =============
</TABLE>
The investment portfolio is used to invest depositors funds and provide a
secondary source of earnings for the Company. In addition, the Company uses the
investment portfolio to secure open positions at securities clearing banks in
connection with its custody services. The portfolio is composed of U.S. Treasury
securities, mortgage-backed securities issued by the Federal National Mortgage
Association ("FNMA" or "Fannie Mae") and the Federal Home
23
<PAGE>
Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"), and Federal Agency
callable bonds issued by FHLMC and the Federal Home Loan Bank ("FHLB").
The Company invests in mortgage-backed securities and Federal Agency
securities to supplement its portfolio of U.S. Treasury securities and increase
the total return of the investment portfolio. Mortgage-backed securities
generally have a higher yield than U.S. Treasury securities due to credit risk
and prepayment risk. Federal Agency callable bonds generally have a higher yield
than U.S. Treasury securities due to credit risk and call risk. Mortgage-backed
securities and Federal Agency callable bonds have credit risk, even though
payment guarantees and credit enhancements substantially reduce it. Mortgage-
backed securities are also subject to the risk that fluctuating interest rates
and other factors may alter the prepayment rate of the loans underlying the
mortgage-backed securities, and so affect both the prepayment speed and the
value of such securities, while Federal Agency callable bonds are subject to the
risk that fluctuating interest rates and other factors may result in the
exercise of the call option by the Federal Agency.
Effective November 1, 1994, the Company classified its investment
portfolio as held-to-maturity. Management had the intent and the Company had the
ability to hold these securities until maturity. In connection with the initial
adoption of the Financial Accounting Standards Board's Special Report, A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities, the Company reassessed the appropriateness of the
classifications of all securities held as of December 31, 1995. As a result of
this reassessment, the Company reclassified debt securities with a carrying
value of $90 million from held-to-maturity to available for sale. The held-to-
maturity portfolio is carried at cost, adjusted for amortization of premiums and
accretion of discounts. The available-for-sale portfolio is carried at fair
value, with the net unrealized gains and losses recognized as an adjustment to
capital until final disposition or recovery.
The book value and weighted average yield of the Company's securities
held to maturity at June 30, 1996, by effective maturity, are reflected in the
following table.
<TABLE>
<CAPTION>
Weighted
Average
Book Value Yield
------------ -----------
<S> <C> <C>
Due from one to five years 114,792 6.72%
Due after five years up to ten years 210,575 6.82%
Due after ten years 40,145 6.51%
------------
Total securities $ 365,512
============
</TABLE>
The book value and weighted average yield of the Company's securities available
for sale at June 30, 1996, by effective maturity, are reflected in the following
table.
<TABLE>
<CAPTION>
Weighted
Average
Book Value Yield
------------ ----------
<S> <C> <C>
Due within one year $ 25,166 5.70%
Due from one to five years 135,781 6.67%
Due after five years up to ten years 20,148 6.81%
------------
Total securities $ 181,095
============
</TABLE>
The maturities of mortgage backed securities have been allocated on the above
tables as described in Note 3 of the Notes to Condensed Consolidated Financial
Statements.
24
<PAGE>
Loan Portfolio
The following table summarizes the Company's loan portfolio for the dates
indicated:
<TABLE>
<CAPTION>
December 31, June 30,
--------------- ------------
1995 1996
--------------- ------------
(Dollars in thousands)
<S> <C> <C>
Loans to individuals $ 12,610 $ 19,037
Loans to not-for-profit organizations 289 197
Loans to mutual funds 10,000 66,890
--------------- -----------
22,899 86,124
Less: allowance for loan losses (35) (84)
--------------- ------------
Net loans $ 22,864 $ 86,040
Floating Rate $ 22,839 $ 86,111
Fixed Rate 25 13
--------------- -----------
$ 22,864 $ 86,124
=============== ===========
</TABLE>
Historically, the Company's loan portfolio has been composed primarily
of loans to individually managed account customers. Although many of its clients
with pooled investment vehicles such as mutual funds use credit lines to
leverage their portfolios or to handle overnight cash shortfalls, CEBA
requirements restricted the Company from making commercial loans of this type.
As a result of the removal of CEBA limitations due to the Spin-Off Transaction,
the Company may now offer lending services directly to all clients and made its
first commercial loan in December 1995.
Virtually all loans to individually managed account customers are
written on a demand basis, bear variable interest rates tied to the prime rate
and are fully secured by liquid collateral, primarily freely tradable securities
held in custody by the Company for the borrower. The Company's first commercial
loan to a mutual fund client, made in December 1995, is a five-year $10,000,000
revolving credit facility, bears a variable interest rate, and is fully secured
by liquid collateral, primarily freely tradable securities held in custody by
the Company for the borrower. In addition, in April 1996, the Company entered
into a $20 million umbrella line of credit with several mutual fund clients
managed by one investment advisor. Loans to mutual funds also include advances
by the Company to certain mutual fund clients pursuant to the terms of the
custody agreements between the Company and those mutual fund clients. The
advances facilitate securities transactions and redemptions involving such
mutual funds and are fully secured by liquid collateral, primarily freely
tradable securities held in custody by the Company for such mutual fund.
At June 30, 1996, the Company's only lending concentration which
exceeded 10% of total loans was the revolving line of credit to a mutual fund
client discussed above. This loan was made in the ordinary course of business on
the same terms and conditions prevailing at the time for comparable
transactions. The Company also had a lending relationship at June 30, 1996 with
Landon T. Clay, an officer of Eaton Vance and a principal stockholder of the
Company, representing two loans aggregating $1,200,000 in principal amount. The
Company also has a loan relationship with another officer of Eaton Vance, M.
Dozier Gardner. These loans to Mr. Clay and Mr. Gardner were made in the
ordinary course of business on the same terms and conditions prevailing at the
time for comparable transactions with unrelated third parties. Each of these
loans was secured with non-voting common stock of Eaton Vance.
The Company's credit loss experience has been excellent. There have been
no loan chargeoffs or adverse credit actions in the history of the Company. It
is the Company's policy to place a loan on non-accrual status when either
principal or interest becomes 60 days past due and the loan's collateral is not
sufficient to cover both principal and accrued interest. As of June 30, 1996,
there were no past due loans, troubled debt restructurings, or any loans on
nonaccrual status. Although virtually all of the Company's loans are fully
collateralized with freely tradable securities, management recognizes some
credit risk inherent in the loan portfolio, and has recorded an allowance for
loan losses of approximately $84,000 at June 30, 1996. This amount is not
allocated to any particular loan, but is intended to absorb
25
<PAGE>
any risk of loss inherent in the loan portfolio. Management actively monitors
the loan portfolio and the underlying collateral and regularly assesses the
adequacy of the allowance for loan losses.
As a result of the removal of CEBA limitations, the Company is now
able to make commercial loans such as the credit lines and advances to mutual
fund clients discussed above. The Company hopes to increase its lending
activities with clients during the remainder of 1996.
Interest Rate Sensitivity
Interest rate risk arises when an earning asset matures or when its
rate of interest changes in a time frame different from that of the supporting
interest-bearing liability. By seeking to minimize the difference between the
amount of earning assets and the amount of interest-bearing liabilities that
could change interest rates in the same time frame, the Company attempts to
reduce the risk of significant adverse effects on net interest income caused by
interest rate changes. The Company does not attempt to match each earning asset
with a specific interest-bearing liability. Instead, as shown in the table
below, it aggregates all of its earning assets and interest-bearing liabilities
to determine the difference between these in specific time frames. This
difference is known as the rate-sensitivity gap. A positive gap indicates that
more earning assets than interest-bearing liabilities mature in a time frame,
and a negative gap indicates the opposite. Maintaining a balanced position will
reduce risk associated with interest rate changes, but it will not guarantee a
stable interest rate spread because the various rates within a time frame may
change by differing amounts and change in different directions.
The Company seeks to manage interest rate risk by investment portfolio
actions designed to address the interest rate sensitivity of asset cash flows in
relation to liability cash flows. Portfolio actions used to manage interest
rate risk include managing the effective duration of the portfolio securities
and utilizing interest rate floors and interest rate swaps. Interest rate
floors and interest rate swaps involve elements of credit and market risk which
are not reflected in the Company's consolidated financial statements. Such
instruments are entered into for hedging (as opposed to investment or
speculative) purposes. There can be no assurance that such portfolio actions
will adequately limit interest rate risk.
26
<PAGE>
The following table presents the repricing schedule for the Company's
interest earning assets and interests bearing liabilities at June 30, 1996:
<TABLE>
<CAPTION>
Within Over Three Over Six Over One
Three to Six to Twelve Year to Over Five
Months Months Months Five Years Years Total
---------- ---------- --------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets (1):
Federal Funds Sold $75,000 $75,000
Investment securities (2) 127,892 $ 22,372 $205,945 $106,383 $84,014 546,606
Loans - fixed rate 13 13
Loans - variable rate 86,111 86,111
---------- ---------- --------- ---------- --------- ---------
Total interest earning assets 289,003 22,372 205,945 106,396 84,014 707,730
Interest bearing liabilities
Demand deposit accounts 174,910 174,910
Savings accounts 28,603 28,603
Time accounts 3,900 3,900
Repurchase Agreements 217,002 217,002
---------- ---------- --------- ---------- --------- ---------
Total interest bearing 424,415 0 0 0 0 424,415
liabilities
---------- ---------- --------- ---------- --------- ---------
Net interest sensitivity gap
during the period ($135,412) $ 22,372 $205,945 $106,396 $84,014 $283,315
========== ========== ======== ======== ======== ========
Cumulative gap ($135,412) ($113,040) $92,905 $199,301 $283,315
Interest sensitive assets as a
percent of interest sensitive
liabilities (cumulative) 68.09% 73.37% 121.89% 146.96% 166.75%
Interest sensitive assets as a
percent of total assets
(cumulative) 38.09% 41.04% 68.18% 82.20% 93.28%
Net interest sensitivity gap as a
percent of total assets (17.85%) 2.95% 27.14% 14.02% 11.07%
Cumulative gap as a percent
of total assets (17.85%) (14.90%) 12.24% 26.27% 37.34%
- ----------------------------------------
</TABLE>
(1) Adjustable rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due. Fixed rate loans are included in the period in which they are
scheduled to be repaid.
(2) Mortgage-backed securities are included in the pricing category that
corresponds with their effective maturity.
27
<PAGE>
Liquidity
Liquidity represents the ability of an institution to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
For a financial institution such as the Company, these obligations arise from
the withdrawals of deposits and the payment of operating expenses.
The Company's primary sources of liquidity include cash and cash
equivalents, federal funds sold, demand loans to individuals, new deposits,
federal funds purchased, interest payments on securities held to maturity, fees
collected from asset administration clients, and the capital raised from the
Offering. Asset liquidity is also provided by managing the duration of the
investment portfolio. As a result of the Company's management of liquid assets
and the ability to generate liquidity through liability funds, management
believes that the Company maintains overall liquidity sufficient to meet its
depositors' needs, to satisfy its operating requirements and to fund the
payment of an anticipated annual cash dividend of approximately $.04 per share.
The Company's ability to pay dividends on the Common Stock and Class A
Common Stock depends on the receipt of dividends from Investors Bank & Trust
Company. Investors Bank & Trust Company has historically paid an aggregate
annual dividend of $60,000 to its stockholders. Any dividend payments by
Investors Bank & Trust Company are subject to certain restrictions imposed by
the Massachusetts Commissioner of Banks. Subject to regulatory requirements,
Investors Bank & Trust Company expects to pay an annual dividend to the
Company, which the Company expects to pay to its stockholders, currently
estimated to be in an amount equal to $.04 per share of outstanding Common
Stock and Class A Common Stock (approximately $257,772 based upon 6,444,312
shares outstanding as of June 30, 1996). On May 15, 1996, the Company paid a
quarterly dividend of $.01 per share to the holders of the Company's Common
Stock and Class A Common Stock. On July 15, 1996, the Board of Directors of
the Company, after declaration by the Bank of a dividend in like amount,
declared a quarterly dividend of $.01 per share payable on August 15, 1996 to
holders of the Company's Common Stock and Class A Common Stock as of July 31,
1996.
At June 30, 1996, cash and cash equivalents were 4% of total assets,
compared to 7% of total assets at December 31, 1995. At June 30, 1996,
approximately $100 million or 13% of total interest earning assets mature
within a one year period.
The Company has informal borrowing arrangements with various
counterparties whereby each counterparty has agreed to make funds available to
the Company at the Federal funds overnight rate. The aggregate amount of these
borrowing arrangements is $57 million. Each bank may terminate its arrangement
at any time and is under no contractual obligation to provide requested funding
to the Company. The Company's borrowings under these arrangements are
typically on an overnight basis. The Company believes that if these banks were
unable to provide funding as described above, a satisfactory alternative source
of funding would be available to the Company.
The Company also has Master Repurchase Agreements in place with
various counterparties whereby each broker has agreed to make funds available
to the Company at various rates in exchange for collateral consisting of
marketable securities. The aggregate amount of these borrowing arrangements is
$425 million.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities, and
financing activities. Cash flows provided by operating activities were
$8,362,000 and $4,702,000 for the six months ended June 30, 1995 and 1996,
respectively. Net cash (used) provided by investing activities, consisting
primarily of purchases of investment securities and proceeds from maturities of
investment securities, was ($35,284,000) and ($427,922,000) for the six months
ended June 30, 1995 and 1996, respectively. Net cash (used) provided by
financing activities, consisting primarily of net activity in deposits, was
$24,417,000 and $427,951,000 for the six months ended June 30, 1995 and 1996,
respectively.
28
<PAGE>
Capital Resources
Historically, the Company has financed its operations primarily
through internally generated cash flows. The Company incurs capital expenditures
for furniture, fixtures and miscellaneous equipment needs. The Company leases
microcomputers through operating leases. Such capital expenditures have been
incurred and such leases entered into on an as-required basis, primarily to meet
the growing operating needs of the Company. In addition, the Company purchased
new transfer agency computer software in April 1996. As a result, the Company's
capital expenditures were $887,000 and $2,592,000 for the six months ended June
30, 1995 and 1996, respectively. Capital expenditures for the remainder of 1996
are expected to approximate $4,204,000 principally for furniture and equipment
related to the Company's move during the first half of 1997 to a new location.
Stockholders' equity at June 30, 1996 was $56,874,000, an increase of
$3,453,000 or 6%, from $53,421,000 at December 31, 1995. The growth in
stockholders' equity is attributable to an adjustment to the actual costs of the
stock issuance completed in November 1995 and current period net income. The
ratio of stockholders' equity to assets decreased to 7.50% at June 30, 1996 from
16.57% at December 31, 1995 due to the significant increase in assets.
The Federal Reserve Board has adopted a system using internationally
consistent risk-based capital adequacy guidelines to evaluate the capital
adequacy of banks and bank holding companies. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
based generally upon the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a "risk-weighted"
asset base. Certain off-balance sheet items, which previously were not expressly
considered in capital adequacy computations, are added to the risk-weighted
asset base by converting them to a balance sheet equivalent and assigning them
the appropriate risk weight.
Federal Reserve Board and FDIC guidelines require that banking
organizations have a minimum ratio of total capital to risk-adjusted assets and
off balance sheet items of 8.0%. Total capital is defined as the sum of "Tier I"
and "Tier II" capital elements, with at least half of the total capital required
to be Tier I. Tier I capital includes, with certain restrictions, the sum of
common stockholders' equity, noncumulative perpetual preferred stock, a limited
amount of cumulative perpetual preferred stock, and minority interests in
consolidated subsidiaries, less certain intangible assets. Tier II capital
includes, with certain limitations, subordinated debt meeting certain
requirements, intermediate-term preferred stock, certain hybrid capital
instruments, certain forms of perpetual preferred stock, as well as maturing
capital instruments and general allowances for loan losses.
The following table summarizes the Company's Tier I and total capital
ratios at June 30, 1996:
<TABLE>
<CAPTION>
June 30, 1996
-------------
Amount Ratio
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 56,581 26.4%
Tier I capital minimum requirement 8,567 4.0%
---------- ----------
Excess Tier I capital $ 48,014 22.4%
========== ==========
Total capital $ 56,665 26.5%
Total capital minimum requirement 17,134 8.0%
---------- ----------
Excess total capital $ 39,531 18.5%
========== ==========
Risk adjusted assets, net of intangible assets $214,179
==========
</TABLE>
In addition to the risk-based capital guidelines, the Federal Reserve Board and
the FDIC use a "Leverage Capital Ratio" as an additional tool to evaluate
capital adequacy. The Leverage Capital Ratio is defined to be a company's Tier I
capital divided by its adjusted total assets. The Leverage Capital Ratio adopted
by the federal banking agencies requires a ratio of 3.0% Tier I capital to
adjusted average total assets for top rated banking institutions. All other
29
<PAGE>
banking institutions will be expected to maintain a Leverage Capital Ratio of
4.0% to 5.0%. The computation of the risk-based capital ratios and the Leverage
Capital Ratio requires the capital of the Company to be reduced by most
intangible assets. The Company's Leverage Capital Ratio at June 30, 1996 was
7.46%, which is in excess of regulatory requirements.
The following tables present average balances, interest income and expense, and
yields earned or paid on the major categories of assets and liabilities for the
periods indicated.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995 Six Months Ended June 30, 1996
---------------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------- ------------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Fed funds sold $ 4,339 $ 130 5.99% $ 24,929 $ 664 5.33%
Interest-earning deposits 1,000 29 5.80% 253 6 4.74%
Investment securities 79,802 2,344 5.87% 383,564 12,263 6.39%
Loans 13,758 613 8.91% 34,031 998 5.87%
----------------- ------------- ------------- ----------- ------------- -------------
Total interest-earning assets 98,899 3,116 6.30% 442,777 13,931 6.29%
------------- ------------- ------------- -------------
Allowance for loan losses (35) (68)
Noninterest-earning assets 18,641 41,864
----------------- -------------
Total assets $117,505 $484,573
================= =============
Interest-bearing liabilities
Deposits:
Demand $ 13,233 235 3.55% $121,616 2,912 4.79%
Savings 10,940 122 2.23% 12,365 138 2.23%
Time - - - 762 20 5.25%
Short Term Borrowings 1,912 67 7.01% 114,845 2,857 4.98%
----------------- ------------- ------------- ----------- ------------- -------------
Total interest-bearing liabilities 26,085 424 3.25% 249,588 5,927 4.75%
------------- ------------- ------------- -------------
Noninterest bearing liabilities
Demand deposits 30,183 130,211
Noninterest bearing time deposits 42,845 45,000
Other liabilities 4,487 7,855
----------------- -----------
Total liabilities 103,600 432,654
Equity 13,905 51,919
----------------- -----------
Total liabilities and equity $117,505 484,573
================= ===========
Net interest income $2,692 $ 8,004
============= =============
Net interest margin (1) 5.44% 3.62%
Average interest rate spread (2) 3.05% 1.54%
Ratio of interest-earning assets to 379.14% 177.40%
interest-bearing liabilities
</TABLE>
- ----------------------------------------
(1) Net interest income divided by total interest-earning assets
(2) Yield on interest-earning assets less rate paid on interest-bearing
liabilities
30
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a. The annual meeting of stockholders was held on April 16, 1996
b. No information provided due to inapplicability of item.
c. A vote was proposed to (1) elect Donald G. Friedl and Phyllis S. Swersky,
current directors of the Company, as Class I Directors of the Company to
serve for a three year term; (2) consider and then act upon a proposal to
approve amendments to the Company's 1995 Non-Employee Director Stock
Option Plan, as described in the Company's proxy statement; and (3) ratify
the selection of Deloitte & Touche LLP as independent accountants for the
Company for the fiscal year ending December 31, 1996.
The voting results are as follows:
<TABLE>
<CAPTION>
Votes Votes Votes Votes Broker
For Against Withheld Abstained Non-Votes
--- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
(1) Donald G. Friedl 6,875,081 N/A 11,630 N/A -
Phyllis S. Swersky 6,875,071 N/A 11,640 N/A -
(2) 1995 Non-Employee 6,283,339 307,179 N/A 229,238 39,154
Director Stock
Option Plan
(3) Deloitte & Touche 6,873,529 4,739 N/A 8,443 -
</TABLE>
d. No information provided due to inapplicability of item.
31
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 11.1: Statement of Computation of Earnings Per Share:
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------
1995 1996
------------ -----------
(in thousands, except per share data)
<S> <C> <C>
Net income $ 459 $2,003
Weighted average number of common shares outstanding 4,030 (2) 6,444
Dilutive effect of common equivalent
shares of stock options and warrants - 21
----------- ---------
Weighted average number of common and
common equivalent shares outstanding 4,030 6,465
=========== =========
Net income per share (1) $ .11 $ .31
=========== =========
</TABLE>
(1) Primary and fully diluted income per share are the same for all
periods presented
(2) Gives pro forma effect to the recapitalization of the Company on
November 8, 1995 whereby the Company issued 3,418,573 shares of
Common Stock and 611,427 shares of Class A Common Stock in exchange
for the 1,000,000 shares of the previously outstanding capital stock
of Investors Bank & Trust Company.
b. No reports on Form 8-K were filed during the quarter ended March 31, 1996.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVESTORS FINANCIAL SERVICES CORP.
Date: August 1, 1996 By: /s/ Kevin J. Sheehan
------------------------------
Kevin J. Sheehan
Chairman, President and Chief
Executive Officer
By: /s/ Karen C. Keenan
------------------------------
Karen C. Keenan
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 26,629,731
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 75,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 181,094,653
<INVESTMENTS-CARRYING> 365,511,653
<INVESTMENTS-MARKET> 361,753,769
<LOANS> 86,123,750
<ALLOWANCE> 84,114
<TOTAL-ASSETS> 758,732,731
<DEPOSITS> 474,368,094
<SHORT-TERM> 217,001,552
<LIABILITIES-OTHER> 10,489,436
<LONG-TERM> 0
0
0
<COMMON> 64,443
<OTHER-SE> 56,809,206
<TOTAL-LIABILITIES-AND-EQUITY> 758,732,731
<INTEREST-LOAN> 997,928
<INTEREST-INVEST> 12,933,112
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,931,040
<INTEREST-DEPOSIT> 3,070,457
<INTEREST-EXPENSE> 5,927,207
<INTEREST-INCOME-NET> 8,003,833
<LOAN-LOSSES> 49,114
<SECURITIES-GAINS> 6,273
<EXPENSE-OTHER> 29,429,611
<INCOME-PRETAX> 5,566,645
<INCOME-PRE-EXTRAORDINARY> 5,566,645
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,423,554
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 3.62
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 35,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 84,114
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 84,114
</TABLE>
