<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 March 31, 1997
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 April 30, 1997, there were 6,124,976 shares of Common Stock
outstanding and 320,336 shares of Class A Common Stock outstanding.
________________________________________________________________________________
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX
-----
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31, 1996 (audited) and
March 31, 1997 (unaudited) 3
Consolidated Income Statements (unaudited)
Three months ended March 31, 1996 and 1997 4
Statement of Stockholder's Equity (unaudited)
Three months ended March 31, 1997 5
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1996 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 16
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES 29
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
____________________________________________________________________________________________________________________________________
DECEMBER 31, MARCH 31,
ASSETS 1996 1997
(audited) (unaudited)
<S> <C> <C>
Cash and due from banks $ 19,226,453 $ 23,082,951
Federal funds sold and securities purchased under resale agreements 120,000,000 -
Securities held to maturity (approximate market values of
$460,182,579 and $648,999,683 at December 31, 1996
and March 31, 1997, respectively) 460,009,923 652,449,979
Securities available for sale 271,120,964 304,235,614
Nonmarketable equity securities 967,400 5,476,600
Loans, less allowance for loan losses of $100,000 at
December 31, 1996 and March 31, 1997 66,236,889 76,608,227
Accrued interest and fees receivable 16,366,171 20,183,133
Equipment and leasehold improvements, net 5,243,974 5,141,450
Other assets 5,289,873 7,111,667
-------------- --------------
TOTAL ASSETS $964,461,647 $1,094,289,621
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 264,914,614 $ 283,528,047
Savings 276,602,295 280,262,692
Time 55,000,000 60,000,000
-------------- --------------
Total deposits 596,516,909 623,790,739
Short-term borrowings 296,820,752 365,181,507
Other liabilities 9,264,676 16,349,003
-------------- --------------
Total liabilities 902,602,337 1,005,321,249
-------------- -------------
Company obligated mandatorily preferred securities of subsidiary trust - 24,244,743
-------------- -------------
Stockholders' equity:
Class A common stock 3,595 3,240
Common stock 60,848 61,213
Surplus 54,352,812 54,369,302
Deferred compensation (1,687,675) (1,577,950)
Retained earnings 8,480,431 11,173,111
Net unrealized gain on securities available for sale 649,299 694,713
-------------- --------------
Total stockholders' equity 61,859,310 64,723,629
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $964,461,647 $1,094,289,621
============== ==============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
____________________________________________________________________________________________________________________________________
MARCH 31, MARCH 31,
1996 1997
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 444,544 $ 675,747
Other short-term investments 6,448 -
Investment securities held to maturity and available for sale 5,095,690 13,691,446
Loans 418,031 664,409
-------------- -------------
Total interest income 5,964,713 15,031,602
-------------- -------------
Interest expense:
Deposits 977,919 4,445,602
Short-term borrowings 1,044,958 4,129,864
-------------- -------------
Total interest expense 2,022,877 8,575,466
-------------- -------------
Net interest income 3,941,836 6,456,136
Provision for loan losses 21,047 -
-------------- -------------
Net interest income after provision for loan losses 3,920,789 6,456,136
Noninterest income:
Asset administration fees 12,797,364 17,625,593
Computer service fees 124,043 116,460
Other operating income 20,343 17,767
Gain on sale of security available for sale 2,448 -
-------------- -------------
Net operating revenue 16,864,987 24,215,956
OPERATING EXPENSES:
Compensation of officers and employees 7,436,913 9,820,726
Pension and other employee benefits 1,350,761 1,647,409
Occupancy 1,161,231 1,088,480
Equipment 1,306,380 1,618,642
Insurance 305,083 181,759
Subcustodian fees 821,815 1,438,498
Depreciation and amortization 310,870 388,339
Professional fees 554,146 916,728
Travel and sales promotion 199,449 331,503
Other operating expenses 1,070,800 1,881,589
-------------- -------------
Total operating expenses 14,517,448 19,313,673
-------------- -------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 2,347,539 4,902,283
Provision for income taxes 927,277 1,822,219
Minority interest expense, net of income taxes - 258,498
NET INCOME $ 1,420,262 $ 2,821,566
============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 6,493,614 6,558,441
============== ==============
EARNINGS PER SHARE $0.22 $0.43
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
INVESTORS FINANCIAL SERVICES CORP.
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997
____________________________________________________________________________________________________________________________________
NET
UNREALIZED
GAIN ON
INVESTMENT
CLASS A SECURITIES
COMMON COMMON DEFERRED RETAINED AVAILABLE
STOCK STOCK SURPLUS COMPENSATION EARNINGS FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $3,595 $60,848 $54,352,812 $(1,687,675) $ 8,480,431 $649,299 $61,859,310
Conversion of class A to common stock (355) 355 -
Amortization of deferred compensation 109,725 109,725
Exercise of stock options 10 16,490 16,500
Net income 2,821,566 2,821,566
Payment of dividend (128,886) (128,886)
Change in net unrealized gain on
securities available for sale 45,414 45,414
------ ------- ----------- ----------- ----------- -------- -----------
BALANCE, MARCH 31, 1997 $3,240 $61,213 $54,369,302 $(1,577,950) $11,173,111 $694,713 $64,723,629
====== ======= =========== =========== =========== ======== ===========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
____________________________________________________________________________________________________________________________________
MARCH 31, MARCH 31,
1996 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,420,262 $ 2,821,566
------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 310,870 388,339
Amortization of deferred compensation 106,162 109,725
Provision for loan losses 21,047 -
Amortization of premiums on securities, net of accretion of discounts 539,813 771,189
Deferred income taxes - 16,879
Gain on sale of securities available for sale (2,448) -
Changes in assets and liabilities:
Accrued interest and fees receivable (2,905,922) (3,816,962)
Other assets (103,761) (1,821,794)
Other liabilities 3,919,632 7,126,236
------------- -------------
Total adjustments 1,885,393 2,773,612
------------- -------------
Net cash provided by operating activities 3,305,655 5,595,178
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 3,874,545 26,279,300
Proceeds from maturities of securities held to maturity 7,068,248 14,698,733
Proceeds from sale of securities available for sale 5,010,591 -
Purchases of securities available for sale (26,978,069) (59,892,284)
Purchases of securities held to maturity (161,988,205) (207,425,019)
Purchase of nonmarketable equity securities - (4,509,200)
Net decrease in time deposits due from banks 1,000,000 -
Net (increase) decrease in federal funds sold and securities
purchased under resale agreements (35,000,000) 120,000,000
Net increase in loans (13,822,640) (10,371,338)
Payments for purchases of equipment and leasehold improvements (106,433) (285,814)
------------- -------------
Net cash used for investing activities (220,941,963) (121,505,622)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits 199,049,687 18,613,432
Net increase in time and savings deposits 298,620 8,660,397
Net increase in short-term borrowings 25,396,899 68,360,756
Stock issuance costs 87,693 (755,257)
Proceeds from exercise of stock options - 16,500
Proceeds from preferred stock - 25,000,000
Dividends paid - (128,886)
------------- -------------
Net cash provided by financing activities 224,832,899 119,766,942
------------- -------------
NET INCREASE IN CASH AND DUE FROM BANKS 7,196,591 3,856,498
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 21,898,903 19,226,453
------------- -------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 29,095,494 $ 23,082,951
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,794,000 $ 8,601,000
============= =============
Cash paid for income taxes $ 1,228,000 $ 503,000
============= =============
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996
AND 1997 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 and investment advisory 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 capital 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 March 31, 1997 and for the three-month
periods ended March 31, 1996 and 1997 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.
7
<PAGE>
3. SECURITIES
<TABLE>
<CAPTION>
Carrying amounts and approximate market values of securities are summarized as follows as of December 31, 1996:
CARRYING UNREALIZED UNREALIZED APPROXIMATE
HELD TO MATURITY VALUE GAINS LOSSES MARKET VALUE
<S> <C> <C> <C> <C>
Mortgage-backed securities $414,664,590 $1,973,263 $1,750,168 $414,887,685
Federal Agency securities 37,517,495 49,546 224,972 37,342,069
Foreign government securities 7,827,838 124,987 - 7,952,825
------------ ---------- ---------- ------------
Total $460,009,923 $2,147,796 $1,975,140 $460,182,579
============ ========== ========== ============
AMORTIZED UNREALIZED UNREALIZED CARRYING
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
U.S. Treasury securities $ 40,107,999 $ 151,304 $ 3 $ 40,259,300
Mortgage-backed securities 229,930,801 1,086,092 155,229 230,861,664
------------ ---------- ---------- ------------
Total $270,038,800 $1,237,396 $ 155,232 $271,120,964
============ ========== ========== ============
Carrying amounts and approximate market values of securities are summarized as follows as of March 31, 1997:
CARRYING UNREALIZED UNREALIZED APPROXIMATE
HELD TO MATURITY VALUE GAINS LOSSES MARKET VALUE
<S> <C> <C> <C> <C>
State and political subdivisions $ 33,325,563 $ - $ 993,364 $ 32,332,199
Mortgage-backed securities 532,884,781 2,196,130 3,951,330 531,129,581
Federal Agency securities 78,425,764 58,001 697,712 77,786,053
Foreign government securities 7,813,871 - 62,021 7,751,850
------------ ---------- ---------- ------------
Total $652,449,979 $2,254,131 $5,704,427 $648,999,683
============ ========== ========== ============
AMORTIZED UNREALIZED UNREALIZED CARRYING
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
U.S. Treasury securities $ 40,049,633 $ 40,631 $ 71,539 $ 40,018,725
Mortgage-backed securities 263,117,192 1,427,226 327,529 264,216,889
------------ ---------- ---------- ------------
Total $303,166,825 $1,467,857 $ 399,068 $304,235,614
------------ ---------- ---------- ------------
</TABLE>
8
<PAGE>
3. SECURITIES (CONTINUED)
Nonmarketable equity securities at March 31, 1997 consisted of $5,477,000 of
stock of the Federal Home Loan Bank of Boston (the "FHLBB"). As a member of
the FHLBB, the Company is required to invest in $100 par value stock of the
FHLBB in an amount equal to the greater of (i) 1% of its outstanding
residential mortgage loan principal (including mortgage pool securities),
(ii) 0.3% of total assets, and (iii) total advances from the FHLBB, divided
by a leverage factor of 20. If and when FHLBB stock is redeemed, the
Company will receive an amount equal to the par value of the stock.
The carrying amounts and approximate market values of securities by
effective maturity are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
CARRYING APPROXIMATE CARRYING APPROXIMATE
HELD TO MATURITY VALUE MARKET VALUE VALUE MARKET VALUE
<S> <C> <C> <C> <C>
Due within one year $ 19,052,213 $ 18,873,837 $ - $ -
Due from one to five years 114,459,070 113,819,081 137,036,412 135,358,295
Due five years up to ten years 240,620,332 241,016,881 364,058,100 362,789,141
Due after ten years 85,878,308 86,472,780 151,355,467 150,852,247
------------ ------------ ------------ ------------
Total $460,009,923 $460,182,579 $652,449,979 $648,999,683
============ ============ ============ ============
DECEMBER 31, 1996 MARCH 31, 1997
AMORTIZED CARRYING AMORTIZED CARRYING
AVAILABLE FOR SALE COST VALUE COST VALUE
Due within one year $ 19,964,080 $ 20,046,800 $ 20,053,119 $ 20,093,750
Due from one to five years 213,758,992 214,525,641 244,802,622 245,479,611
Due five years up to ten years 36,315,728 36,548,523 38,311,084 38,662,253
------------ ------------ ------------ ------------
Total $270,038,800 $271,120,964 $303,166,825 $304,235,614
============ ============ ============ ============
</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.
There were no sales of securities available for sale during the three months
ended March 31, 1997.
The carrying value of securities pledged amounted to approximately
$362,000,000 and $408,000,000 at December 31, 1996 and March 31, 1997,
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
lines of credit and advances pursuant to the terms of the custody
agreements between the Company and those mutual fund clients to
facilitate securities transactions and redemptions. Generally, the loans
are, or may be, in the event of default, collateralized with marketable
securities held by the Company as custodian. There were no impaired or
nonperforming loans at December 31, 1996 or March 31, 1997. In addition,
there have been no loan charge-offs or recoveries during the three months
ended March 31, 1996 and 1997. Loans consisted of the following at
December 31, 1996 and March 31, 1997:
9
<PAGE>
4. LOANS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
<S> <C> <C>
Loans to individuals $23,448,999 $17,837,098
Loans to not-for-profit institutions 12,500 12,500
Loans to mutual funds 42,875,390 58,858,629
----------- -----------
66,336,889 76,708,227
Less allowance for loan losses 100,000 100,000
----------- -----------
Total $66,236,889 $76,608,227
=========== ===========
</TABLE>
The Company had commitments to lend of approximately $37,128,000 and $58,005,000
at December 31, 1996 and March 31, 1997, 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, 1996 and March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
<S> <C> <C>
Furniture, fixtures and equipment $8,516,450 $7,572,020
Leasehold improvements 744,395 755,559
---------- ----------
Total 9,260,845 8,327,579
Less accumulated depreciation and amortization 4,016,871 3,186,129
---------- ----------
Equipment and leasehold improvements, net $5,243,974 $5,141,450
========== ==========
</TABLE>
6. DEPOSITS
Time deposits at December 31, 1996 and March 31, 1997 include
noninterest-bearing amounts of approximately $55,000,000 and $60,000,000,
respectively.
All time deposits had a minimum balance of $100,000 and a maturity
of less than three months at December 31, 1996 and March 31, 1997.
7. SHORT-TERM BORROWINGS
The major components of short-term borrowings are as follows at
December 31, 1996 and March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
<S> <C> <C>
Repurchase agreements $296,421,201 $335,011,449
FHLBB advance - 30,000,000
Treasury, Tax and Loan account 399,551 170,058
------------ ------------
Total $296,820,752 $365,181,507
============ ============
</TABLE>
10
<PAGE>
7. SHORT-TERM BORROWINGS (CONTINUED)
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 $296,421,201 and $335,011,499 at
December 31, 1996 and March 31, 1997 respectively. The interest
rate on the outstanding agreements at December 31, 1996 was 5.91% and all
agreements matured on January 2, 1997. The interest rates on the
outstanding agreements at March 31, 1997 ranged from 5.68% to 5.85% and all
agreements matured by April 1, 1997. The following securities were pledged
under these agreements at December 31, 1996 and March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
CARRYING APPROXIMATE CARRYING APPROXIMATE
VALUE MARKET VALUE VALUE MARKET VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 37,249,940 $ 37,249,940 $ 37,017,795 $ 37,017,795
Federal Agency securities 25,000,000 24,803,950 25,000,000 24,543,700
Mortgage-backed securities 245,689,672 246,777,873 284,522,070 286,001,337
------------ ------------ ------------ ------------
Total $307,939,612 $308,831,763 $346,539,865 $347,562,832
============ ============ ============ ============
</TABLE>
The Company has a borrowing arrangement with the FHLBB which is utilized on
an overnight basis to satisfy temporary funding requirements. The Company
had liabilities under this agreement of $0 at December 31, 1996 and
$30,000,000 at March 31, 1997. The interest rate on the outstanding balance
at March 31, 1997 was 7.03%.
The Company receives federal tax deposits from clients as agent for the
Federal Reserve Bank and accumulates these deposits in the Treasury, Tax and
Loan account. The Federal Reserve Bank charges the Company interest at the
Federal Funds rate on such deposits. The Company had liabilities under this
agreement of $399,551 at December 31, 1996 and $170,058 at 31, 1997. The
interest rates on the outstanding balance at December 31, 1996 and March 31,
1997 were 5.10% and 5.67%, respectively.
8. COMPANY OBLIGATED MANDATORILY PREFERRED SECURITIES OF SUBSIDIARY TRUST
On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities (the "Capital Securities"). The
Capital Securities were issued by Investors Capital Trust I (the "Trust"), a
Delaware statutory business trust sponsored by the Company. The proceeds of
the Capital Securities were invested in 9.77% Junior Subordinated Debentures
(the "Debentures") issued by the Company. The Debentures will mature on
February 1, 2027 except that such maturity may under certain circumstances
be advanced. The Company has guaranteed all of the Trust's obligations under
the Capital Securities to the extent that the Trust has funds available to
meet such obligations. The guarantee constitutes an unsecured obligation of
the Company and is subordinate and ranks junior in right of payment to all
senior indebtedness of the Company.
9. STOCKHOLDERS' EQUITY
The Company 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, 1996 and March 31,
1997, there were no preferred shares issued or outstanding. There were
359,545 and 323,973 shares of Class A Common Stock and 6,084,767 and
6,121,339 Common Stock issued and outstanding at December 31, 1996 and March
31, 1997, 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 three stock option plans, the 1995 Stock Plan, the 1995 Non-
Employee Director Stock Option Plan, and the 1997 Employee Stock Purchase
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.
11
<PAGE>
9. STOCKHOLDERS' EQUITY (CONTINUED)
In November 1995, the Company granted 114,000 shares of Common Stock 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 $1,687,675 and $1,577,950 December 31, 1996 and
March 31, 1997, respectively, pursuant to these grants.
Under the terms of the 1995 Non-Employee Director Stock Option Plan, as
amended at the Company's 1997 Annual Meeting of Stockholders, the Company
may grant options to non-employee directors to purchase up to a maximum of
100,000 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, directors may
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.
The 1997 Employee Stock Purchase Plan was adopted by the Board of Directors
on January 14, 1997 and subsequently approved by the stockholders at the
Company's 1997 Annual Meeting. The Company has authorized the issuance of
140,000 shares of Common Stock pursuant to the exercise of nontransferable
options granted to participating employees. The 1997 Purchase Plan permits
eligible employees to purchase up to 1,000 shares of Common Stock per
payment period, subject to limitations provided by Section 423(b) of the
Internal Revenue Code, through accumulated payroll deductions. The purchases
are made twice a year at a price equal to the lesser of (i) 90% of the
average market value of the Common Stock on the first business day of the
payment period, or (ii) 90% of the average market value of the Common Stock
on the last business day of the payment period. Annual payments periods
consist of two six-month periods, January 1 through June 30 and July 1
through December 31.
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, 1996 345,150 $16.50 - $26.125
Granted 11,104 $27.50 - $34.25
Exercised (1,000) $16.50
Expired - -
----------
Outstanding at March 31, 1997 355,254 $16.50 - $34.25
==========
Exercisable at March 31, 1997 83,543
==========
</TABLE>
In February, 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share", effective for financial
statements for both interim and annual periods ending after December 15,
1997. Pursuant to SFAS No. 128 requirements, the Company has calculated
earnings per share for the quarters ended March 31, 1996 and 1997. The
following table illustrates earnings per share calculated pursuant to SFAS
No. 128:
12
<PAGE>
9. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1996 MARCH 31, 1997
---------------------------------------- ---------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share $1,420,262 6,444,312 $ 0.22 $2,821,566 6,444,534 $ 0.44
========== ==========
Dilutive Effect of Options 49,302 113,907
_________ _________
Diluted Earnings Per Share $1,420,262 6,493,614 $ 0.22 $2,821,566 6,558,441 $ 0.43
========== ========= ========== ========== ========= ==========
</TABLE>
Basic earnings per share were computed by dividing net income by the sum of
the weighted average shares of Common Stock and Class A Common Stock
outstanding during the periods. Diluted earnings per share included stock
options using the treasury stock method to the extent that the average share
price exceeds the exercise price.
10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
LINES OF CREDIT - At March 31, 1997, the Company had commitments to
individuals under collateralized open lines of credit totaling $85,413,700,
against which $27,409,106 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
March 31, 1997:
Interest rate contracts:
Swap agreements $200,000,000
Floor contracts $30,000,000
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 the other party may default on its
contractual obligation, so-called counterparty risk. Credit risk is 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 $454,241 at March 31, 1997.
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 March 31, 1997 was $22,708,000. In addition, other
cash balances in the amount of $1,391,679 were pledged to secure clearings
with a depository institution as of March 31, 1997.
LEASE COMMITMENTS - Minimum future commitments on noncancelable operating
leases at March 31, 1997 were as follows:
<TABLE>
<CAPTION>
Bank
Fiscal Year Ending Premises Equipment
<S> <C> <C>
1997 $ 3,197,158 $981,385
1998 4,873,331 896,378
1999 4,873,331 560,448
2000 4,873,331 20,790
2001 and beyond 31,154,658 -
</TABLE>
Total rent expense was $1,559,000 and $1,568,611 for the three months
ended March 31, 1996 and 1997, respectively.
13
<PAGE>
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On February 1, 1996, the Company entered into a five year facility
management agreement with a third party provider of duplicating and delivery
services. Under the terms of the agreement, the Company agreed to pay
certain minimum annual charges, subject to increases due to certain usage
thresholds. Service expense under this contract was $108,074 for the three
months ended March 31, 1997. No service expense was recognized during the
comparable 1996 period.
CONTINGENCIES - The Company provides domestic and global custody,
multicurrency accounting, institutional transfer agency, performance
measurement, foreign exchange, securities lending, mutual fund
administration and investment advisory 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 March 31, 1997 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 matched positions 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, 1996 and March 31, 1997 is as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
----------------------------------- -----------------------------------
UNREALIZED UNREALIZED
CURRENCY PURCHASES SALES GAIN/LOSS PURCHASES SALES GAIN/LOSS
<S> <C> <C> <C> <C> <C> <C>
Japan (Yen) $ 40,828 $ 40,828 - $ 37,159 $ 37,159 -
France (Franc) 1,093 1,093 - 9,521 9,521 -
Germany (Mark) 2,118 2,118 - 5,877 5,877 -
United Kingdom (Pound) 1,873 1,873 - 5,530 5,530 -
Hong Kong (Dollar) 1,807 1,807 - 3,543 3,543 -
Indonesia (Rupiah) 198 198 - 1,750 1,750 -
Netherlands (Guilder) 918 918 - 1,615 1,615 -
Spain (Peseta) 85 85 - 1,489 1,489 -
Switzerland (Franc) - - - 1,302 1,302 -
Canada (Dollar) - - - 1,196 1,196 -
South Africa (Rand) 222 222 - 1,166 1,166 -
Malaysia (Ringgit) 6,009 6,009 - 1,157 1,157 -
Italy (Lira) 51 51 - 1,072 1,072 -
Other currencies 1,944 1,944 - 5,280 5,280 -
-------- -------- -------- -------- -------- ----------
$ 57,146 $ 57,146 - $ 77,657 $ 77,657 -
======== ======== ======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
The maturity of contracts outstanding as of March 31, 1997 is as follows:
Maturity Purchases Sales
<S> <C> <C>
April 1997 $ 67,481 $67,481
May 1997 2,535 2,535
June 1997 5,141 5,141
August 1997 2,500 2,500
</TABLE>
14
<PAGE>
13. REGULATORY MATTERS
The Company and the bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's statements. Under capital
adequacy guidelines and framework for prompt corrective action, the Bank
must meet guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of March 31, 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 21, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the institution's category. The following table presents the
capital ratios for the Bank. The capital ratios for the Company are
substantially similar to those of the Bank.
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1997:
Total Capital
(to Risk Weighted Assets) $87,990,206 31.30% $22,491,911 8.00% $28,114,889 10.00%
Tier I Capital
(to Risk Weighted Assets) $87,890,206 31.26% $11,245,956 4.00% $16,868,933 6.00%
Tier I Capital
(to Average Assets) $87,890,206 8.04% $43,726,099 4.00% $54,657,623 5.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $60,818,485 24.71% $19.691,528 8.00% $24,614,410 10.00%
Tier I Capital
(to Risk Weighted Assets) $60,718,485 24.67% $ 9,845,764 4.00% $14,768,646 6.00%
Tier I Capital
(to Average Assets) $60,718,485 9.65% $25,155,710 4.00% $31,444,637 5.00%
</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.
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 Condensed 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, mutual fund administration
and investment advisory services to a variety of financial asset managers,
including 54 mutual fund complexes, investment advisors, banks and insurance
companies. Currently, the Company provides financial asset administration
services for assets totaling approximately $131 billion, including
approximately $10 billion of foreign assets. The Company also engages in
private banking transactions, including secured lending and deposit accounts.
In November 1996, the Bank executed agreements with the Merrimac Master
Portfolio and the Merrimac Funds, newly formed master-feeder investment
companies (the "Funds"), pursuant to which the Company has agreed to act as
investment advisor to the Funds. At the same time, the Company engaged the Bank
of New York to act as sub-advisor to manage the investments of the Funds. In
addition to acting as advisor to the Funds, the Bank has entered into
agreements to provide custody, fund accounting, administration, transfer agency
and certain other related services to the Funds. Currently, the Funds have two
operating master funds, the Merrimac Cash Portfolio and the Merrimac Treasury
Portfolio, and three operating feeder funds, the Merrimac Cash Fund, the
Merrimac Global Cash Fund and the Merrimac Treasury Fund. The Merrimac feeder
funds offer shares only to institutions and other "accredited investors" (as
that term is defined in Rule 501(a) under the Securities Act of 1933) and
invest all of their assets in the Merrimac master funds. The Funds may add
additional feeder funds and master funds in the future.
On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities (the "Capital Securities"). The Capital
Securities were issued by Investors Capital Trust I, a Delaware statutory
business trust sponsored by the Company. The capital raised in the offering,
along with existing capital and earnings generated in the future, will be used
to support the Company's balance sheet growth resulting from deposits expected
to be obtained from asset administration clients. The Capital Securities
qualify as Tier 1 capital under the capital guidelines of the Federal Reserve.
Under current Federal Reserve guidelines, no more than 25% of the Company's
Tier 1 capital may comprise Capital Securities and other capital securities and
cumulative preferred stock of the Company. See "Part II- Recent Sales of
Unregistered Securities."
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 44% from $16,865,000 in the first three
months of 1996 to $24,216,000 in the first three months of 1997.
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 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
16
<PAGE>
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.
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,
including fees for the provision of investment advisory and other services to
the Merrimac Funds and the Merrimac Master Portfolios, 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 the 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.
STATEMENT OF OPERATIONS
Comparison of Operating Results for the Quarters Ended March 31, 1997 and 1996
Noninterest Income
Noninterest income increased $4,816,000 to $17,760,000 for the quarter
ended March 31, 1997 from $12,944,000 for the prior period. Noninterest income
consists of the following items:
<TABLE>
<CAPTION>
For the Quarters Ended
March 31,
------------------------------ -------------------
1996 1997 Change
-------- -------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $ 12,798 $ 17,626 38%
Computer service fees 124 116 (6)
Other operating income 20 18 (10)
Gain on sale of security available for sale 2 - -
-------- --------
Total Noninterest Income $ 12,944 $ 17,760 37%
======== ========
</TABLE>
17
<PAGE>
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, mutual
fund administration and investment advisory services. Total assets processed
increased to $131 billion at March 31, 1997 from $100 billion at March 31,
1996. Of the $31 billion net increase in assets processed during the period,
approximately 26% of the increase reflects assets processed for new clients,
and the remainder of the of the increase reflects growth of assets processed
for existing clients. The remainder of the growth in asset administration fees
was due to the net expansion of relationships with existing clients, increased
use of the Company's foreign exchange and securities lending services, and
advisory fees related to the Merrimac Funds.
Computer service 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 transaction-
oriented private banking fees.
Operating Expenses
Total operating expenses increased by $4,797,000 to $19,314,000 for the
quarter ended March 31, 1997 compared to $14,517,000 for the quarter ended
March 31, 1996. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the Quarters Ended
March 31,
---------------------- --------
1996 1997 Change
---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation $ 7,437 $ 9,821 32%
Pension and other employee benefits 1,351 1,647 22
Occupancy 1,161 1,088 (6)
Equipment 1,306 1,619 24
Insurance 305 182 (40)
Subcustodian fees 822 1,438 75
Depreciation and amortization 311 388 25
Professional fees 554 917 66
Travel and sales promotion 199 332 67
Other operating expenses 1,071 1,882 76
---------- --------
Total Operating Expenses $14,517 $19,314 33%
========== ========
</TABLE>
Compensation of officers and employees increased by $2,384,000 or 32%
from quarter to quarter due to several factors. The average number of employees
increased 25% to 852 during the quarter ended March 31, 1997 from 680 during the
same period in 1996. This increase relates primarily to the increase in new
client relationships and to the expansion of existing client relationships
during the period. In addition, compensation expense related to the Company's
management incentive plan increased because of the increase in earnings in the
first quarter of 1997 compared to the first quarter of 1996. The remainder of
the increase in compensation expense resulted from salary increases.
Pension and other employee benefits increased to $1,647,000 for the
quarter ended March 31, 1997 from $1,351,000 for the same period in 1996. The
22% increase was due principally to increased payroll taxes attributable to the
increase in compensation expense. In addition, the Company recognized costs
associated with establishing a defined benefit retirement plan for the Company's
Dublin subsidiaries, including approximately $90,000 of expense recognized for
employees' service for prior years.
Equipment expense consists of operating lease payments for
microcomputers and fees charged by Electronic Data Systems for mainframe data
processing and data storage services provided to the Company. These expenses
vary with the level of assets processed by the Company. The $313,000 increase
between periods is due principally to the growth in assets processed.
18
<PAGE>
Insurance expense decreased 40% from $305,000 for the quarter ended
March 31, 1996 to $182,000 for the quarter ended March 31, 1997 due to the
renegotiation, in May 1996, of the Company's coverage for errors and omissions
liability, directors and officers liability and blanket bond.
Subcustodian expense increased $616,000 to $1,438,000 for the quarter
ended March 31, 1997 from $822,000 for the quarter ended March 31, 1996. This
increase resulted from the increase in foreign assets processed, which are
typically subject to higher subcustodian fees than domestic assets processed,
from $7.5 billion at March 31, 1996 to $9.9 billion at March 31, 1997, and from
the movement by clients into emerging markets with higher cost structures.
Depreciation and amortization expense increased $77,000 between periods
due to purchases of furniture, equipment, and capitalized software in late 1996
and in 1997.
Professional fees increased $363,000 to $917,000 for the quarter ended
March 31, 1997 from $554,000 for the quarter ended March 31, 1996. This increase
results primarily from the Company's increased use of contract programmers to
perform systems development work.
Travel and sales promotion expense increased $133,000 to $332,000 for
the quarter ended March 31, 1997 from $199,000 for the quarter ended March 31,
1996 due to increased travel to the foreign subsidiaries.
Other operating expenses include fees for daily market pricing data,
recruiting costs, telephone and office supplies expense, and temporary help.
These expenses increased $811,000 to $1,882,000 for the quarter ended March 31,
1997 from $1,071,000 for the quarter ended March 31, 1996. Fees for daily market
pricing data, which vary with the level of assets processed, increased by
$71,000 during the period. Recruiting costs and costs of temporary help
accounted for $349,000 of the quarterly increase; this increase relates to the
tight labor market caused by a period of low unemployment in Massachusetts
during the first quarter of 1997. Other expenses such as telephone and office
supplies vary with staffing levels. Expenses relating to these items represented
$142,000 of the quarterly increase. Additionally, $108,000 of the increase
related to the Company's decision to outsource its mailroom and photocopy
facility in February, 1996; expenses related to these services were included in
compensation prior to that time. Approximately $119,000 of the increase relates
to annual maintenance fees related to software used to generate automated
financial statements for the Company's clients as part of its expanded mutual
fund administration services.
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 March 31, 1997 compared to the same period
in 1996.
<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 $ 240 $ (15) $ 225
Investment securities 8,713 (117) 8,596
Loans 324 (78) 246
------ ------ ------
Total interest-earning assets 9,277 (210) 9,067
INTEREST-BEARING LIABILITIES
Deposits 3,270 196 3,466
Borrowings 3,119 (32) 3,087
------ ------ ------
Total interest-bearing liabilities 6,389 164 6,553
------ ------ ------
Change in net interest income $2,888 $(374) $2,514
====== ====== ======
</TABLE>
19
<PAGE>
Net interest income increased $2,514,000 or 64% to $6,456,000 for the
quarter ended March 31, 1997 from $3,942,000 for the same period in 1996. This
net increase resulted from an increase in interest income of $9,067,000 offset
in part by an increase in interest expense of $6,553,000. The net impact of the
above changes was a 165 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 March 31, 1997 increased
$610,550,000 or 151% compared to the same period in 1996. This growth primarily
resulted from an increase in average interest earning assets of $592,713,000.
Interest expense increased $6,553,000 due primarily to a $541,632,000
increase in deposits and short term borrowings for the quarter ended March 31,
1997 compared to the same period in 1996. Also, to a lesser extent, interest
expense increased due to an increase in the average interest rate paid by the
Company from 4.66% to 4.80% during the period.
Income Taxes
The Company's earnings were taxed on the federal level at 35% for the
1997 and 1996 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 11.32%. The provision for income taxes
for the quarter ended March 31, 1997 increased by $895,000 over the same period
in 1996. The overall effective tax rate decreased to 37.2% for the quarter ended
March 31, 1997, from 39.5% for the same period in 1996. The decrease in the
effective tax rate is due to the Company's investment in municipal securities in
the first quarter of 1997.
FINANCIAL CONDITION
Investment Portfolio
The following table summarizes the Company's investment portfolio
for the dates indicated:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
-------------- -----------
(Dollars in thousands)
<S> <C> <C>
SECURITIES HELD TO MATURITY:
State and political subdivisions $ - $ 33,325
Mortgage-backed securities 414,665 532,885
Federal Agency securities 37,517 78,426
Foreign government securities 7,828 7,814
--------- ----------
Total securities held to maturity $ 460,010 $652,450
========= ==========
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 40,259 $ 40,019
Mortgage-backed securities 230,862 264,217
--------- ----------
Total securities available for sale $ 271,121 $ 304,236
========= ==========
</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
institutions 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 Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac"), and Federal Agency callable
bonds issued by FHLMC and the Federal Home Loan Bank of
20
<PAGE>
Boston (the "FHLBB"), municipal securities, and foreign government bonds issued
by the Canadian provinces of Ontario and Manitoba.
The Company invests in mortgage-backed securities and Federal Agency
callable bonds 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. Credit risk results from the possibility that a
loss may occur if a counterparty is unable to meet the terms of a contract.
Prepayment risk results from the possibility that changes in interest rates may
cause mortgage securities to be paid off prior to their maturity dates. Federal
Agency callable bonds generally have a higher yield than U.S. Treasury
securities due to credit risk and call risk. Credit risk results from the
possibility that the Federal Agency issuing the bonds may be unable to meet the
terms of the bond. Call risk results from the possibility that fluctuating
interest rates and other factors may result in the exercise of the call option
by the Federal Agency. Credit risk related to mortgage-backed securities and
Federal Agency callable bonds is substantially reduced by payment guarantees and
credit enhancements.
The Company invests in municipal securities to generate stable, tax
advantaged income. Municipal securities generally have lower stated yields than
Federal Agency and U.S. Treasury securities, but the after-tax yields are
comparable. Municipal securities are subject to credit risk.
The Company invests in foreign government bonds in order to generate
foreign source income to maximize the use of the foreign tax credit. The foreign
government bonds are denominated in U.S. dollars to avoid foreign currency risk.
These bonds are subject to credit risk.
The book value and weighted average yield of the Company's securities
held to maturity at March 31, 1997, by effective maturity, are reflected in the
following table.
<TABLE>
<CAPTION>
Weighted
Book Average
Value Yield
------------- --------
<S> <C> <C>
Due within one year $ -
Due from one to five years 137,036 6.68%
Due after five years up to ten years 364,058 6.84%
Due after ten years 151,356 6.36%
---------
Total securities $ 652,450
=========
</TABLE>
The book value and weighted average yield of the Company's securities available
for sale at March 31, 1997, by effective maturity, are reflected in the
following table.
<TABLE>
<CAPTION>
Weighted
Book Average
Value Yield
--------- --------
<S> <C> <C>
Due within one year $ 20,094 6.35%
Due from one to five years 245,480 6.86%
Due after five years up to ten years 38,662 7.05%
--------
Total securities $304,236
========
</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.
21
<PAGE>
Loan Portfolio
The following table summarizes the Company's loan portfolio for the dates
indicated:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Loans to individuals $23,449 $17,837
Loans to not-for-profit organizations 13 13
Loans to mutual funds 42,875 58,858
---------- ----------
66,337 76,708
Less: allowance for loan losses (100) (100)
---------- ----------
Net loans $66,237 $76,608
Floating Rate $66,324 $76,695
Fixed Rate 13 13
---------- ----------
$66,337 $76,708
========== ==========
</TABLE>
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. Since December 1995, the
Company has entered into agreements to provide up to an aggregate of $40 million
under lines of credit to mutual fund clients. These unsecured lines of credit
may, in the event of a default, be collateralized at the Company's option by
securities held in custody by the Company for those mutual funds. 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
clients. The advances facilitate securities transactions and redemptions
involving those mutual funds and are fully collateralized by liquid collateral,
primarily freely tradable securities held in custody by the Company for those
mutual funds.
At March 31, 1997, the Company's only lending concentrations which
exceeded 10% of total loans were revolving lines of credit to mutual fund
clients as discussed above. These loans were 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 March 31, 1997 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.
These loans to Mr. Clay 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 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 March 31, 1997, 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 $100,000 at March 31, 1997. This amount is not allocated to any
particular loan, but is intended to absorb 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.
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
22
<PAGE>
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.
23
<PAGE>
The following table presents the repricing schedule for the Company's
interest earning assets and interest bearing liabilities at March 31, 1997:
<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):
Investment securities (2) $ 381,768 $ 164,467 $177,327 $129,656 $103,468 $ 956,686
Loans - fixed rate 13 13
Loans - variable rate 76,695 76,695
----------- --------- -------- -------- -------- ----------
Total interest earning assets 458,463 164,467 177,327 129,669 103,468 1,033,394
----------- --------- -------- --------- -------- ----------
Interest bearing liabilities:
Demand deposit accounts 110,961 110,961
Savings accounts 280,263 280,263
Interest rate contracts (180,000) 50,000 80,000 50,000 0
Short term borrowings 365,181 365,181
----------- --------- -------- -------- -------- ----------
Total interest bearing
liabilities 576,405 50,000 80,000 50,000 0 756,405
----------- --------- -------- -------- -------- ----------
Net interest sensitivity gap
during the period ($ 117,942) $ 114,467 $ 97,327 $ 79,669 $103,468 $ 276,989
=========== ========= ======== ======== ======== ==========
Cumulative gap ($ 117,942) ($ 3,475) $ 93,852 $173,521 $276,989
=========== ========= ======== ======== ========
Interest sensitive assets as a
percent of interest sensitive
liabilities (cumulative) 79.54% 99.45% 113,29% 122.94% 136.62%
Interest sensitive assets as a
percent of total assets
(cumulative) 41.90% 56.93% 73.13% 84.98% 94.44%
Net interest sensitivity gap as a
percent of total assets (10.78%) 10.46% 8.89% 7.28% 9.46%
Cumulative gap as a percent
of total assets (10.78%) (0.32%) 8.58% 15.86% 25.31%
- ---------------------------------
</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.
24
<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,
short term borrowings, interest payments on securities held to maturity and
available for sale, fees collected from asset administration clients, and the
capital raised from the sale of the Capital Securities. 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 $.08 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. 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 $.08 per share of
outstanding Common Stock and Class A Common Stock (approximately $515,625 based
upon 6,445,312 shares outstanding as of March 31, 1997).
At March 31, 1997, cash and cash equivalents were 2% of total assets.
At March 31, 1997, approximately $20 million or 2% 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 $86 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 also has a borrowing arrangement with the FHLBB whereby the
Company may borrow amounts determined by prescribed collateral levels and the
amount of FHLBB stock held by the Company. The minimum amount of FHLBB stock
held by the Company is required to be the greater (i) 1% of its outstanding
residential mortgage loan principal (including mortgage pool securities), (ii)
0.3% of total assets, (iii) total advances from the FHLBB, divided by a
leverage factor of 20. The aggregate amount of borrowing available to the
Company under this arrangement at March 31, 1997 was $481 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
$3,306,000 and $5,595,000 for the quarters ended March 31, 1996 and 1997,
respectively. Net cash used by investing activities, consisting primarily of
purchases of investment securities and proceeds from maturities of investment
securities, was $220,942,000 and $121,506,000 for the quarters ended March 31,
1996 and 1997, respectively. Net cash provided by financing activities was
$224,833,000 and $119,767,000 for the quarters ended March 31, 1996 and 1997,
respectively. Net cash from financing activities in both periods consisted
primarily of net activity in deposits, but also included, during the 1997
period, the issuance of the Capital Securities.
25
<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. As a result, the Company's
capital expenditures were $106,000 and $286,000 for the quarters ended March
31, 1996 and 1997, respectively.
On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities. The capital raised in the offering,
along with existing capital and earnings generated in the future, will be used
to support the Company's balance sheet growth resulting from deposits expected
to be obtained from asset administration clients.
Stockholders' equity at March 31, 1997 was $64,724,000, an increase of
$2,865,000 or 4.6%, from $61,859,000 at December 31, 1996. The ratio of
stockholders' equity to assets decreased to 5.91% at March 31, 1997 from 6.41%
at December 31, 1996 due to the significant increase in assets. The Capital
Securities, net of issuance costs of $755,000, combined with stockholders'
equity comprise the Company's total capitalization.
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 Bank's Tier I and total capital
ratios at March 31, 1997:
<TABLE>
<CAPTION>
March 31, 1997
---------------------
Amount Ratio
----------- ---------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 87,890 31.3%
Tier I capital minimum requirement 11,246 4.0%
---------- ---------
Excess Tier I capital $ 76,644 27.3%
========== =========
Total capital $ 87,990 31.3%
Total capital minimum requirement 22,492 8.0%
---------- ---------
Excess total capital $ 65,498 23.3%
========== =========
Risk adjusted assets, net of
intangible assets $ 281,149
==========
</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
26
<PAGE>
agencies requires a ratio of 3.0% Tier I capital to adjusted average total
assets for top rated banking institutions. All other 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 that the capital of the Company be reduced by most intangible assets.
The Bank's Leverage Capital Ratio at March 31, 1997 was 8.04%, which is in
excess of regulatory requirements. The capital ratios of the Company are
substantially similar to those of the Bank.
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>
Three Months Ended March 31, 1996 Three Months Ended March 31, 1997
----------------------------------------------------------------------------
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 and securities
purchased under resale agreements $ 33,264 $ 445 5.35% $ 51,544 $ 676 5.25%
Interest-earning deposits 505 6 4.75% - - -
Investment securities 305,127 5,096 6.68% 839,559 13,692 6.52%
Loans 22,759 418 7.35% 63,265 664 4.20%
--------- -------- --------- --------- --------- --------
Total interest-earning assets 361,655 5,965 6.60% 954,368 15,032 6.30%
-------- --------- --------- --------
Allowance for loan losses (49) (100)
Noninterest-earning assets 42,899 60,787
---------- ----------
Total assets $404,505 $1,015,055
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand $ 76,941 909 4.73% $ 119,986 1,462 4.87%
Savings 13,009 72 2.21% 253,387 2,985 4.71%
Short Term Borrowings 83,536 1,042 4.99% 341,745 4,129 4.83%
-------- --------- --------- ---------- --------- ---------
Total interest-bearing liabilities 173,486 2,023 4.66% 715,118 8,576 4.80%
--------- --------- ---------- --------- ---------
Noninterest bearing liabilities
Demand deposits 126,930 161,048
Noninterest bearing time deposits 45,000 48,944
Other liabilities 7,502 10,813
-------- ---------
Total liabilities 352,918 935,923
Trust Preferred Stock - 15,894
Equity 51,587 63,238
--------- ----------
Total liabilities and equity $404,505 $1,015,055
========= ==========
Net interest income $ 3,942 $ 6,456
======== =========
Net interest margin (1) 4.36% 2.71%
Average interest rate spread (2) 1.94% 1.50%
Ratio of interest-earning assets to 208.5% 133.5%
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
27
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities. The Capital Securities were issued by
Investors Capital Trust I, a Delaware statutory business trust sponsored by the
Company. The sale of the Capital Securities was underwritten by Keefe,
Bruyette & Woods, Inc. ("Keefe"), pursuant to which Keefe received compensation
in the amount of $562,500. The Capital Securities were sold only to "Qualified
Institutional Buyers" (as defined in Rule 144A under the Securities Act of 1933
(the "Act") and institutional "accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Act) pursuant to the exemption provided by
Section 4(2) of the Act.
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 March 31,
----------------------------------------
1996 1997
------------- ----------
(in thousands, except per share data)
<S> <C> <C>
Net income $ 1,420 $ 2,822
Weighted average number of common shares outstanding 6,444 6,444
Dilutive effect of common equivalent shares of stock
options and warrants 50 114
Weighted average number of common and ------------ -----------
common equivalent shares outstanding $ 6,494 6,558
============ ===========
Net income per share (1) $ .22 $ .43
============ ===========
</TABLE>
(1) Primary and fully diluted income per share are the same for all
periods presented
b. On January 27, 1997, the Company filed a Current Report on Form 8-K
reporting the then proposed sale of the Capital Securities described under
"Item 2. Recent Sales of Unregistered Securities". The Company did not file
any other Current Reports on Form 8-K during the two months ended March 31,
1997.
28
<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: May 5, 1997 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
(Principal Financial and Accounting
Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 23,082,951
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 304,235,614
<INVESTMENTS-CARRYING> 652,449,979
<INVESTMENTS-MARKET> 648,999,683
<LOANS> 76,708,227
<ALLOWANCE> 100,000
<TOTAL-ASSETS> 1,094,289,621
<DEPOSITS> 623,790,739
<SHORT-TERM> 365,181,507
<LIABILITIES-OTHER> 16,349,003
<LONG-TERM> 0
24,244,743
0
<COMMON> 64,453
<OTHER-SE> 64,659,176
<TOTAL-LIABILITIES-AND-EQUITY> 1,094,289,621
<INTEREST-LOAN> 664,409
<INTEREST-INVEST> 14,367,193
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,031,602
<INTEREST-DEPOSIT> 4,445,602
<INTEREST-EXPENSE> 8,575,466
<INTEREST-INCOME-NET> 6,456,136
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 19,313,673
<INCOME-PRETAX> 4,902,283
<INCOME-PRE-EXTRAORDINARY> 4,902,283
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,821,566
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 2.71
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 100,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 100,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 100,000
</TABLE>
