<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
TO
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)
200 CLARENDON STREET, P.O. BOX 9130, BOSTON, MA 02117-9130
(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>
<TABLE>
<CAPTION>
The undersigned registrant hereby amends the following item of its Quarterly Report
on Form 10-Q as set forth on the pages attached hereto:
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>
2
<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.
3
<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
4
<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>
5
<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.
6
<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>
7
<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:
8
<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>
9
<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.
10
<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>
11
<PAGE>
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.
12
<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>
13
<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.
14
<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: July 16, 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)
15
<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>
