<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1998
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, Boston, MA 02116
(Address of principal executive offices, including Zip Code)
(617) 330-6700
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
------ ------
As of July 31, 1998, there were 6,703,040 shares of Common Stock outstanding.
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX
-----
PART I FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1997 (audited) and
June 30, 1998 (unaudited) 3
Condensed Consolidated Income Statements (unaudited)
Six months ended June 30, 1997 and 1998 4
Condensed Consolidated Income Statements (unaudited)
Three months ended June 30, 1997 and 1998 5
Condensed Statement of Stockholder's Equity (unaudited)
Six months ended June 30, 1998 6
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1997 and 1998 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 6. Exhibits and Reports on Form 8-K 41
SIGNATURES 42
2
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1998
(unaudited)
<S> <C> <C>
Cash and due from banks $ 17,298,566 $ 35,195,951
Federal funds sold and securities purchased under resale agreements 75,000,000 35,000,000
Securities held to maturity (approximate market values of
$809,708,389 and $963,295,155 at December 31, 1997
and June 30, 1998, respectively) 802,046,077 955,143,294
Securities available for sale 462,850,089 489,749,346
Nonmarketable equity securities 5,476,600 7,626,500
Loans, less allowance for loan losses of $100,000
at December 31, 1997 and June 30, 1998 55,944,957 69,789,107
Accrued interest and fees receivable 22,874,836 26,508,190
Equipment and leasehold improvements, net 8,556,231 9,541,039
Other assets 10,399,420 15,122,633
---------------- ----------------
TOTAL ASSETS $1,460,446,776 $1,643,676,060
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 354,616,945 $ 348,225,784
Savings 427,122,987 548,807,803
Time 65,000,000 65,000,000
---------------- ----------------
Total deposits 846,739,932 962,033,587
Short-term borrowings 499,932,628 561,845,785
Other liabilities 13,899,936 13,849,693
---------------- ----------------
Total liabilities 1,360,572,496 1,537,729,065
---------------- ----------------
Commitments and Contingencies (Note 12)
Company obligated mandatorily redeemable preferred securities of subsidiary
holding solely junior subordinated deferrable interest debentures of
the Company 24,161,104 24,175,256
---------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock 66,643 67,059
Surplus 55,903,286 57,143,765
Deferred compensation (1,248,775) (1,453,617)
Retained earnings 19,525,129 25,578,427
Accumulated other comprehensive income 1,466,893 436,145
Treasury stock (at par, 4,000 shares) - (40)
---------------- ----------------
Total stockholders' equity 75,713,176 81,771,739
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,460,446,776 $ 1,643,676,060
---------------- ----------------
---------------- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited)
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 843,520 $ 718,741
Investment securities held to maturity and available for sale 29,839,706 39,715,701
Loans 1,340,295 1,515,539
-------------- --------------
Total interest income 32,023,521 41,949,981
Interest expense:
Deposits 9,459,602 12,424,457
Short-term borrowings 9,518,221 16,609,154
-------------- --------------
Total interest expense 18,977,823 29,033,611
-------------- --------------
Net interest income 13,045,698 12,916,370
Noninterest income:
Asset administration fees 36,862,304 45,023,010
Computer service fees 338,549 272,778
Other operating income 1,315,582 467,697
Gain on sale of securities available for sale 7,110 471,066
-------------- --------------
Net operating revenue 51,569,243 59,150,921
OPERATING EXPENSES:
Compensation and benefits 24,845,379 29,346,643
Technology and telecommunications 5,188,857 5,321,853
Transaction processing services 3,902,328 3,961,611
Occupancy 2,314,039 3,417,779
Depreciation and amortization 921,959 1,269,811
Travel and sales promotion 798,764 1,002,791
Professional fees 1,146,060 788,258
Insurance 373,636 392,419
Other operating expenses 1,738,254 1,740,738
-------------- --------------
Total operating expenses 41,229,276 47,241,903
-------------- --------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 10,339,967 11,909,018
Provision for income taxes 3,587,087 4,380,131
Minority interest expense, net of income taxes 651,333 781,600
-------------- --------------
NET INCOME 6,101,547 6,747,287
-------------- --------------
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising during the period 1,096,814 (1,030,748)
-------------- --------------
Other comprehensive income (loss) 1,096,814 (1,030,748)
-------------- --------------
Comprehensive income $ 7,198,361 $ 5,716,539
-------------- --------------
-------------- --------------
BASIC EARNINGS PER SHARE $ 0.92 $ 1.01
-------------- --------------
-------------- --------------
DILUTED EARNINGS PER SHARE $ 0.90 $ 0.98
-------------- --------------
-------------- --------------
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited)
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 167,773 $ 370,182
Investment securities held to maturity and available for sale 16,148,260 19,752,681
Loans 675,886 846,834
-------------- --------------
Total interest income 16,991,919 20,969,697
Interest expense:
Deposits 5,014,000 6,773,104
Short-term borrowings 5,388,357 8,404,347
-------------- --------------
Total interest expense 10,402,357 15,177,451
-------------- --------------
Net interest income 6,589,562 5,792,246
Noninterest income:
Asset administration fees 18,843,662 23,335,416
Computer service fees 180,163 138,793
Other operating income 601,138 277,110
Gain on sale of securities available for sale 7,110 270,639
-------------- --------------
Net operating revenue 26,221,635 29,814,204
OPERATING EXPENSES:
Compensation and benefits 12,686,630 14,679,424
Technology and telecommunications 2,703,919 2,715,514
Transaction processing services 1,864,617 1,930,634
Occupancy 1,188,849 1,730,872
Depreciation and amortization 517,048 669,104
Travel and sales promotion 462,822 586,007
Professional fees 538,733 521,622
Insurance 188,239 199,000
Other operating expenses 826,120 532,618
-------------- --------------
Total operating expenses 20,976,977 23,564,795
-------------- --------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 5,244,658 6,249,409
Provision for income taxes 1,759,506 2,322,983
Minority interest expense, net of income taxes 392,835 390,800
-------------- --------------
NET INCOME 3,092,317 3,535,626
-------------- --------------
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising during the period 1,051,401 (809,672)
-------------- --------------
Other comprehensive income (loss) 1,051,401 (809,672)
-------------- --------------
Comprehensive income $ 4,143,718 $ 2,725,954
-------------- --------------
-------------- --------------
BASIC EARNINGS PER SHARE $ 0.47 $ 0.53
-------------- --------------
-------------- --------------
DILUTED EARNINGS PER SHARE $ 0.46 $ 0.51
-------------- --------------
-------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Accumulated
Other
Common Deferred Retained Comprehensive Treasury
Stock Surplus Compensation Earnings Income (Loss) Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $66,643 $55,903,286 $(1,248,775) $19,525,129 $ 1,466,893 $ -- $75,713,176
Additions to deferred
compensation 100 499,900 (500,000) -- -- --
Amortization of deferred
compensation -- -- 295,158 -- -- -- 295,158
Exercise of stock options 316 817,539 -- -- -- -- 817,855
Purchase of treasury stock -- (76,960) -- -- -- (40) (77,000)
Net income -- -- -- 6,747,287 -- -- 6,747,287
Cash dividend to IFSC
shareholders -- -- -- (388,623) -- -- (388,623)
Cash dividend to S Corp
shareholders -- -- -- (250,000) -- -- (250,000)
Non-cash dividend to S Corp
shareholders -- -- -- (55,366) -- -- (55,366)
Change in accumulated other
comprehensive income(loss) -- -- -- -- (1,030,748) -- (1,030,748)
------- ----------- ------------ ----------- ------------- --------- -----------
BALANCE, JUNE 30, 1998 $67,059 $57,143,765 $(1,453,617) $25,578,427 $ 436,145 $(40) $81,771,739
------- ----------- ------------ ----------- ------------- --------- -----------
------- ----------- ------------ ----------- ------------- --------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,101,547 $ 6,747,287
-------------- --------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 921,959 1,269,811
Amortization of deferred compensation 219,450 295,158
Amortization of premiums on securities, net of accretion of
discounts 1,618,885 4,327,659
Deferred income taxes 16,879 --
Loss on sale of securities available for sale, net (7,110) (471,066)
Changes in assets and liabilities:
Accrued interest and fees receivable (3,793,996) (3,633,354)
Other assets (2,455,208) (4,723,213)
Other liabilities 3,640,676 529,552
-------------- --------------
Total adjustments 161,535 (2,405,453)
-------------- --------------
Net cash provided by operating activities 6,263,082 4,341,834
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 42,026,107 102,805,446
Proceeds from maturities of securities held to maturity 33,985,925 144,378,339
Proceeds from sales of securities available for sale 5,002,734 81,269,837
Purchases of securities available for sale (99,507,745) (214,530,372)
Purchases of securities held to maturity (291,570,831) (299,386,861)
Purchase of nonmarketable equity securities (4,509,200) (2,149,900)
Net decrease in federal funds sold and securities
purchased under resale agreements 57,000,000 40,000,000
Net increase in loans (36,190,311) (13,844,150)
Purchases of equipment and leasehold improvements (2,782,403) (2,295,832)
-------------- --------------
Net cash used for investing activities (296,545,724) (163,753,493)
-------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (CONTINUED)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in demand deposits $ 81,272,053 $ (6,391,161)
Net increase (decrease) in time and savings deposits 63,162,217 121,684,816
Net increase in short-term borrowings 112,303,164 61,913,157
Cost of trust preferred issuance (783,668) --
Contribution of capital to S corp 360,000 --
Proceeds from issuance of trust preferred stock 25,000,000 --
Proceeds from issuance of common stock 18,562 817,855
Purchase of treasury stock -- (77,000)
Cash dividend to S corp shareholders (185,566) (250,000)
Cash dividend to IFSC shareholders (257,793) (388,623)
------------ -------------
Net cash provided by financing activities 280,888,969 177,309,044
------------- -------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (9,393,673) 17,897,385
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 19,094,514 17,298,566
------------- -------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 9,700,841 $ 35,195,951
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 18,876,000 $ 27,658,000
------------- -------------
------------- -------------
Cash paid for income taxes $ 3,611,000 $ 3,817,000
------------- -------------
------------- -------------
</TABLE>
See notes to condensed consolidated financial statements.
8
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE SIX MONTHS AND THE THREE MONTHS ENDED JUNE 30,
1997 AND 1998 IS UNAUDITED)
- ------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Investors Financial Services Corp. ("IFSC") provides asset administration
services for the financial services industry through its wholly owned
subsidiaries, Investors Bank & Trust Company (the "Bank") and Investors
Capital Services, Inc. The Bank provides 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. 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 its subsidiaries.
On September 19,1997, pursuant to the terms of the Certificate of
Incorporation of the Company, all shares of the Company's Class A Common
Stock automatically converted into shares of the Company's Common Stock.
The terms of the Class A Common Stock were identical to the terms of the
Common Stock, except that the Common Stock receives only one vote per
share rather than the ten votes per share previously received by Class A
Common Stock.
On May 29, 1998, the Company acquired AMT Capital Services, Inc. and an
affiliated company ("AMT Capital Services"), a New York based firm
recognized for providing fund administration services to global and
domestic institutional investment management firms. Under the terms of the
agreement, the Company acquired all of the outstanding capital stock of
AMT Capital Services in exchange for 194,006 shares of the Company's
common stock. The acquisition was accounted for under the pooling of
interests method of accounting. Upon completion of the acquisition, AMT
Capital Services became a wholly owned subsidiary of the Company and was
renamed Investors Capital Services, Inc.
2. INTERIM FINANCIAL STATEMENTS
The 1998 condensed consolidated interim financial statements of the
Company and condensed consolidated subsidiaries as of June 30, and for the
six month periods and three-month periods ended June 30, 1997 and 1998
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.
As a result of the AMT Capital Services, Inc. acquistion, all of the
current and prior period financial statements have been restated.
9
<PAGE>
3. SECURITIES
Carrying amounts and approximate market values of securities are
summarized as follows as of December 31, 1997:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Approximate
Held to Maturity Value Gains Losses Market Value
<S> <C> <C> <C> <C>
State and political subdivisions $ 35,224,790 $ 2,296,252 $ - $ 37,521,042
Mortgage-backed securities 590,364,940 5,649,718 514,023 595,500,635
Federal agency securities 168,687,478 545,863 491,229 168,742,112
Foreign government securities 7,768,869 175,731 - 7,944,600
------------------- ----------------- --------------- ------------------
Total $ 802,046,077 $ 8,667,564 $ 1,005,252 $ 809,708,389
=================== ================= =============== ==================
</TABLE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Carrying
Available for Sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 30,002,114 $ 90,136 $ - $ 30,092,250
State and political subdivisions 8,348,265 33,588 - 8,381,853
Mortgage-backed securities 422,207,689 2,624,065 455,768 424,375,986
------------------- ----------------- --------------- ------------------
Total $ 460,558,068 $ 2,747,789 $ 455,768 $ 462,850,089
=================== ================= =============== ==================
</TABLE>
Carrying amounts and approximate market values of securities are
summarized as follows as of June 30, 1998:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Approximate
Held to Maturity Value Gains Losses Market Value
<S> <C> <C> <C> <C>
State and political subdivisions $ 35,518,537 $ 2,676,500 $ - $ 38,195,037
Mortgage-backed securities 733,120,607 4,895,446 739,748 737,276,305
Federal agency securities 178,766,287 1,425,820 305,144 179,886,963
Foreign government securities 7,737,863 198,987 - 7,936,850
------------------- ---------------- ----------------- ----------------
Total $ 955,143,294 $ 9,196,753 $ 1,044,892 $ 963,295,155
=================== ================ ================= =================
</TABLE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Carrying
Available for Sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 9,989,313 $ 56,037 $ - $ 10,045,350
Municipal bonds 39,227,056 73,224 83,135 39,217,145
Mortgage-backed securities 361,944,678 1,828,739 954,209 362,819,208
Federal agency securities 28,581,831 21,075 5,263 28,597,643
Corporate debt 49,324,991 - 254,991 49,070,000
------------------- ---------------- ----------------- -----------------
Total $ 489,067,869 $ 1,979,075 $ 1,297,598 $ 489,749,346
=================== ================ ================= =================
</TABLE>
10
<PAGE>
3. SECURITIES (CONTINUED)
Nonmarketable equity securities at June 30, 1998 consisted 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, 1997 June 30, 1998
Carrying Approximate Carrying Approximate
Held to Maturity Value Market Value Value Market Value
<S> <C> <C> <C> <C>
Due from one to five years $ 357,580,590 $ 360,361,877 $ 310,846,614 $ 312,582,268
Due five years up to ten years 183,840,479 184,373,997 189,393,188 190,621,514
Due after ten years 260,625,008 264,972,515 454,903,492 460,091,373
------------------ ----------------- ------------------ ---------------
Total $ 802,046,077 $ 809,708,389 $ 955,143,294 $ 963,295,155
------------------ ----------------- ------------------ ---------------
------------------ ----------------- ------------------ ---------------
December 31, 1997 June 30, 1998
Amortized Carrying Amortized Carrying
Available for Sale Cost Value Cost Value
<S> <C> <C> <C> <C>
Due within one year $ 20,020,094 $ 20,039,100 $ 9,989,313 $ 10,045,350
Due from one to five years 307,636,460 309,517,768 346,011,654 346,830,727
Due five years up to ten years 132,367,416 132,756,384 66,726,758 66,785,851
Due after ten years 534,098 536,837 66,340,144 66,087,418
------------------ ----------------- ------------------- ------------------
Total $ 460,558,068 $ 462,850,089 $ 489,067,869 $ 489,749,346
------------------ ----------------- ------------------ ---------------
------------------ ----------------- ------------------ ---------------
</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.
Twelve available for sale securities were sold during the six months ended
June 30, 1998, resulting in gains totaling $471,066.
The carrying value of securities pledged amounted to approximately
$590,000,000 at December 31, 1997 and the market value of securities
pledged amounted to approximately $614,000,000 at June 30, 1998.
Securities are pledged primarily to secure public funds and clearings with
other depository institutions.
11
<PAGE>
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, 1997 or June 30, 1998. In addition, there have been
no loan charge-offs or recoveries during the six months ended June 30,
1997 and 1998. Loans consisted of the following at December 31, 1997 and
June 30, 1998:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
<S> <C> <C>
Loans to individuals $ 26,857,933 $ 20,086,324
Loans to not-for-profit institutions 12,500 12,500
Loans to mutual funds 29,174,524 49,790,283
---------------- -----------------
56,044,957 69,889,107
Less allowance for loan losses 100,000 100,000
---------------- -----------------
Total $ 55,944,957 $ 69,789,107
---------------- -----------------
---------------- -----------------
</TABLE>
The Company had commitments to lend of approximately $62,845,000 and
$71,514,000 at December 31, 1997 and June 30, 1998, 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, 1997 and June 30, 1998:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
<S> <C> <C>
Furniture, fixtures and equipment $ 11,660,572 $ 13,336,897
Leasehold improvements 977,336 969,230
------------------ ------------------
Total 12,637,908 14,306,127
Less accumulated depreciation and amortization (4,081,677) (4,765,088)
------------------ ------------------
Equipment and leasehold improvements, net $ 8,556,231 $ 9,541,039
------------------ ------------------
------------------ ------------------
</TABLE>
6. DEPOSITS
Time deposits at December 31, 1997 and June 30, 1998 include
noninterest-bearing amounts for both years of approximately $65,000,000.
All time deposits had a minimum balance of $100,000 and a maturity of less
than three months at December 31, 1997 and June 30, 1998.
12
<PAGE>
7. SHORT-TERM BORROWINGS
The major components of short-term borrowings are as follows at
December 31, 1997 and June 30, 1998:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
<S> <C> <C>
Repurchase agreements $499,188,363 $440,345,407
Federal funds purchased -- 45,000,000
FHLBB advance -- 75,000,000
Treasury, tax and loan account 744,265 1,500,378
------------ ------------
Total $499,932,628 $561,845,785
------------ ------------
------------ ------------
</TABLE>
The Company enters into repurchase agreements whereby securities are
sold by the Company under agreements to repurchase. The interest rate on
the outstanding agreements at December 31, 1997 ranged from 4.95% to
5.90% and all agreements matured by March 3, 1998. The interest rates on
the outstanding agreements at June 30, 1998 ranged from 5.20% to 5.62%
and all agreements mature by July 31, 1998. The amount outstanding at
June 30, 1998 was the highest amount outstanding at any month end during
the period ended June 30, 1998. The average balance during the period
ended June 30, 1998 was $560,431,000.
The Company purchases excess reserves in the form of federal funds from
other banks in order to meet the Federal Reserve Bank ("FRB")
requirements. The interest rate on the outstanding balance at June 30,
1998 was 6.25%.
The Company has a borrowing arrangement with the FHLBB which is utilized
on an overnight basis to satisfy temporary funding requirements. The
interest rate on the outstanding balance at June 30, 1998 was 5.96%. The
Company has the option to put the advance back to FHLBB on the 22nd day
of each month, and the advance matures on March 27, 2000.
The Company receives federal tax deposits from clients as agent for the
FRB and accumulates these deposits in the Treasury, tax and loan
account. The FRB charges the Company interest at the Federal funds rate
on such deposits. The interest rates on the outstanding balance at
December 31, 1997 and June 30, 1998 were 5.26% and 5.46%, respectively.
The following securities were pledged under these agreements at December
31, 1997 and June 30, 1998:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
Carrying Approximate Carrying Approximate
Value Market Value Value Market Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 20,392,469 $ 20,392,469 $ -- $ --
Federal agency securities -- -- 79,864,765 80,434,845
Mortgage-backed securities 501,141,751 503,300,183 406,208,338 407,989,228
Corporate debt -- -- 49,070,000 49,070,000
-------------- ------------ ------------ ------------
Total $ 521,534,220 $523,692,652 $535,143,103 $537,494,073
-------------- ------------ ------------ ------------
-------------- ------------ ------------ ------------
</TABLE>
13
<PAGE>
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF
THE COMPANY
On January 31, 1997, a trust sponsored and wholly owned by the Company
issued $25,000,000 in 9.77% Trust Preferred Securities (the "Capital
Securities"), the proceeds of which were invested by the trust in the same
aggregate principal amount of the Company's newly issued 9.77% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the
"Junior Subordinated Debentures"). The $25,000,000 aggregate principal
amount of the Junior Subordinated Debentures represents the sole asset of
the Trust. The Company has guaranteed, on a subordinated basis,
distributions and other payments due on the Capital Securities (the
"Guarantee"). The Guarantee, when taken together with the Company's
obligations under (i) the Debentures, (ii) the indenture pursuant to which
the Junior Subordinated Debentures were issued, and (iii) the Amended and
Restated Declaration of Trust governing the Trust constitutes a full and
unconditional guarantee of the Trust's obligations under the Capital
Securities.
9. STOCKHOLDERS' EQUITY
The Company has authorized 1,000,000 shares of Preferred Stock and
20,000,000 shares of Common Stock, all with a par value of $.01 per share.
At December 31, 1997 and June 30, 1998, there were no preferred shares
issued or outstanding. There were 6,664,319 and 6,701,915 shares of Common
Stock issued and outstanding at December 31, 1997 and June 30, 1998,
respectively.
The Company has three stock option plans, the Amended and Restated 1995
Stock Plan, the 1995 Non-Employee Director Stock Option Plan, and the 1997
Employee Stock Purchase Plan.
Under the terms of the Amended and Restated 1995 Stock Plan, the Company
may grant options to purchase up to a maximum of 1,160,000 shares of
Common Stock to certain employees, consultants, directors and officers. Of
the 1,160,000 shares of Common Stock authorized for issuance under the
plan, 534,706 were available for grant at June 30, 1998. The options may
be awarded as incentive stock options (employees only), nonqualified stock
options, stock awards or opportunities to make direct purchases of stock.
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. On
March 31, 1998 the Company repurchased 4,000 unvested shares for $77,000
under the terms of the 1995 Stock Plan. On May 29, 1998, the Company
granted 10,000 shares of Common Stock to certain officers of AMT Capital
Services, Inc. in connection with the acquisition of AMT Capital Serivices,
Inc. The Company has recorded deferred compensation of $1,248,775 and
$1,453,617 at December 31, 1997 and June 30, 1998, respectively, pursuant
to these grants.
Under the terms of the 1995 Non-Employee Director Stock Option Plan, as
amended, 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 on November 8, 1995 to
each director. Any director elected or appointed after such date receives
an automatic initial grant of options to purchase 2,500 shares upon
becoming a director. Thereafter, each director receives 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.
14
<PAGE>
9. STOCKHOLDERS' EQUITY (Continued)
The exercise price of options under the 1995 Non-Employee Director Stock
Option Plan and the incentive options under the Amended and Restated 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 Amended and
Restated 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.
Under the terms of the 1997 Employee Stock Purchase Plan the Company may
issue up to 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 payment periods consist of two six-month periods, January 1
through June 30 and July 1 through December 31.
A summary of option activity under the 1995 Non-Employee Director Stock
Option and the Amended and Restated 1995 Stock plans is as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
<S> <C> <C>
Outstanding at December 31, 1997 517,284 $ 30
Granted 55,628 50
Exercised (21,230) 47
Canceled (22,606) 23
--------
Outstanding at June 30, 1998 529,076 36
--------
--------
Outstanding and exercisable at June 30, 1998 176,406
--------
--------
</TABLE>
Under The Employee Stock Purchase Plan, adopted in fiscal year 1997, the
Company sold 10,366 shares of Common Stock to employees at June 30, 1998.
The exercise price of the stock was $43.25, or 90% of the average market
value of the Common Stock on the last business day of the payment period.
15
<PAGE>
9. STOCKHOLDERS' EQUITY (Continued)
Earnings Per Share - Under SFAS 128, the Company is required to
disclose a reconciliation of Basic EPS and Diluted EPS for the periods
ended June 30, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
--------- --------- ---------
<S> <C> <C> <C>
June 30, 1998
Basic EPS
Income available to common stockholders $6,747,287 6,682,781 $ 1.01
--------
--------
Dilutive effect of common equivalent
shares of stock options 202,053
---------
Diluted EPS
Income available to common stockholders $6,747,287 6,884,834 $ 0.98
---------- --------- --------
---------- --------- --------
June 30, 1997
Basic EPS
Income available to common stockholders $6,101,547 6,638,318 $ 0.92
--------
--------
Dilutive effect of common equivalent
shares of stock options 137,321
---------
Diluted EPS
Income available to common stockholders $6,101,547 6,775,639 $ 0.90
---------- --------- --------
---------- --------- --------
</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 the
effect of stock options using the treasury stock method to the extent that
the average closing price exceeds the exercise price.
16
<PAGE>
10. COMPREHENSIVE INCOME
During the period ended March 31, 1998, the Company adopted the
Statement of Financial Accounting Standards ("SFAS"), No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. SFAS No. 130 requires
that the Company classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet.
11. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Lines of Credit -- At June 30, 1998, the Company had commitments to
individuals under collateralized open lines of credit totaling
$100,271,000 with variable interest rates, against which $28,757,000 in
loans were 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 -- Interest rate contracts involve an agreement
with a counterparty to exchange cash flows based on an underlying interest
rate index. Swap agreements involve 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 Company was party to swap
agreements with aggregate notional amounts of $430,000,000 as of June 30,
1998. The effect of these agreements was to lengthen short-term variable
rate liabilities into longer-term fixed-rate liabilities. The positive
market value of the interest rate contracts was $93,245 at June 30, 1998.
The Company does not purchase derivative financial instruments for trading
purposes. Interest rate swap agreements are matched with specific
financial instruments reported on the balance sheet and periodic cash
payments are accrued on a settlement basis.
The Company also enters into foreign exchange contracts, as discussed in
Note 13, with clients and simultaneously enters into matched positions
with other banks. These contracts are subject to market value
fluctuations in foreign currencies.
17
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
Restrictions on Cash Balances -- The Company is required to maintain
certain average cash reserve balances with the FRB. The reserve balance
requirement as of June 30, 1998 was $32,570,000. In addition, other cash
balances in the amount of $1,561,893 were pledged to secure clearings with
a depository institution as of June 30, 1998.
Lease Commitments -- Minimum future commitments on noncancelable
operating leases at June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Bank
Fiscal Year Ending Premises Equipment
<S> <C> <C>
1998 $ 3,155,000 $ 1,072,000
1999 6,310,000 1,867,000
2000 6,051,000 726,000
2001 5,932,000 54,000
2002 and beyond 30,915,000 --
</TABLE>
Total rent expense was $3,235,000 and $4,443,000 for the six months ended
June 30, 1997 and 1998, respectively.
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 $213,000 and
$305,000 for the six months ended June 30, 1997 and 1998, respectively.
Contingencies -- The Company provides 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 June 30, 1998 that
are material to the consolidated financial position or results of
operations of the Company.
18
<PAGE>
13. 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.
A summary of foreign exchange contracts outstanding at December 31, 1997
and June 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
-------------------------------------------------- --------------------------------------------
Unrealized Unrealized
Currency Purchases Sales Gain/Loss Purchases Sales Gain/Loss
<S> <C> <C> <C> <C> <C> <C>
Netherlands (NLG) $ 271 $ 271 - $ 17,809 $ 17,809 -
Italy (ITL) 145 145 - 16,791 16,791 -
Japan (JPY) 5,000 5,000 - 13,156 13,156 -
Hong Kong (HKD) 5,011 5,011 - 6,647 6,647 -
France (FRF) 4,292 4,292 - 6,538 6,538 -
Czechoslovakia (CZK) - - - 5,456 5,456 -
Germany (DEM) 1,016 1,016 - 3,761 3,761 -
Singapore (SGD) 368 368 - 2,407 2,407 -
United Kingdom (GBP) 3,440 3,440 - 1,318 1,318 -
Sweden (SEK) 317 317 - 1,185 1,185 -
Poland (PLN) - - - 1,042 1,042 -
Other currencies 3,082 3,082 - 2,452 2,452 -
------------- ------------ -------------- -------------- ------------- ------------
$ 22,942 $ 22,942 - $ 78,562 $ 78,562 -
------------- ------------ -------------- -------------- ------------- ------------
------------- ------------ -------------- -------------- ------------- ------------
</TABLE>
The maturity of contracts outstanding as of June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Maturity Purchases Sales
<S> <C> <C>
July 1998 $60,740 $60,740
August 1998 11,482 11,482
November 1998 6,340 6,340
</TABLE>
14. 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 and the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and 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 Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of June 30, 1998, that the Company and the Bank meet all capital
adequacy requirements to which it is subject.
19
<PAGE>
14. REGULATORY MATTERS (Continued)
As of June 30, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Company and the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
Company's or the Bank's category. The following table presents the capital
ratios for the Bank and the Company for the quarter ended June 30, 1998
and the year ended December 31, 1997.
<TABLE>
<CAPTION>
Minimum To Be Well Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Corrective Action Provisions
----------------------- ---------------------- ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total Capital
(to Risk Weighted Assets
- the Company) $105,610,851 22.89% $ 36,908,841 8.00% N/A N/A
(to Risk Weighted Assets
- the Bank) $102,788,461 22.35% $ 36,794,153 8.00% $ 45,992,691 10.00%
Tier I Capital
(to Risk Weighted Assets
- the Company) $105,510,851 22.87% $ 18,454,421 4.00% N/A N/A
Tier I Capital
(to Risk Weighted Assets
- the Bank) $102,688,461 22.33% $ 18,397,076 4.00% $ 27,595,614 6.00%
Tier I Capital
(to Average Assets
- the Company) $105,510,851 6.96% $ 60,666,867 4.00% N/A N/A
Tier I Capital
(to Average Assets
- the Bank) $102,688,461 6.78% $ 60,578,187 4.00% $ 75,722,733 5.00%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets
- the Company) $ 98,507,386 29.20% $ 26,984,903 8.00% N/A N/A
Total Capital
(to Risk Weighted Assets
- the Bank) $ 96,140,693 28.57% $ 26,918,947 8.00% $ 33,648,684 10.00%
Tier I Capital
(to Risk Weighted Assets
- the Company) $ 98,407,386 29.17% $ 13,492,452 4.00% N/A N/A
Tier I Capital
(to Risk Weighted Assets
- the Bank) $ 96,040,693 28.54% $ 13,459,473 4.00% $ 20,189,210 6.00%
Tier I Capital
(to Average Assets
- the Company) $ 98,407,386 6.44% $ 61,105,815 4.00% N/A N/A
Tier I Capital
(to Average Assets
- the Bank) $ 96,040,693 6.31% $ 60,892,699 4.00% $ 76,115,874 5.00%
</TABLE>
20
<PAGE>
14. REGULATORY MATTERS (Continued)
Under Massachusetts law, trust companies such as the Bank may only pay
dividends out of "net profits" and only to the extent such payments will
not impair the capital stock and surplus account. If, prior to declaration
of a dividend, the Bank's capital stock and surplus accounts equal less
than 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.
21
<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
subsidiaries, Investors Bank & Trust Company and Investors Capital Services,
Inc., provides 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 59 mutual fund complexes,
investment advisors, banks and insurance companies. Currently, the Company
provides financial asset administration services for assets totaling
approximately $164 billion, including approximately $12 billion of foreign
assets. The Company also engages in private banking transactions, including
secured lending and deposit accounts.
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 15% from $51,569,000 in the
first six months of 1997 to $59,151,000 in the first six months of 1998.
Noninterest income consists primarily of fees for financial asset
administration and is principally derived from custody, multicurrency
accounting, transfer agency, mutual fund administration, and investment
advisory 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, the number of portfolio transactions, income
collected and other value-added services such as foreign exchange, securities
lending and performance measurement. Asset-based fees are usually charged on
a sliding scale. As such, when the assets in a portfolio under custody grow
as a result of changes in market values or cash inflows, the Company's fees
may be a smaller percentage of those assets. Fees for individually managed
accounts, such as custodial, trust and portfolio accounting services for
individuals, investment advisors, private trustees, financial planners, other
banks and fiduciaries and other institutions are also included in noninterest
income.
Net interest income represents the difference between income generated
from interest-earning assets and expense on interest-bearing liabilities.
Interest-bearing liabilities are generated by the Company's clients who, in
the course of their financial asset management, generate cash balances which
they deposit on a short-term basis with the Company. The Company invests
these cash balances and remits a portion of the earnings on these investments
to its clients. The Company's share of earnings from these investments is
viewed as part of the total package of compensation paid to the Company from
its clients for performing asset administration services.
Recent and Pending Acquisitions
BankBoston Institutional Trust and Custody Acquisition
- ------------------------------------------------------
On July 17, 1998, Investors Bank & Trust Company ("Investors Bank"), a
wholly-owned subsidiary of the Company, entered into a Purchase and Sale
Agreement (the "Agreement") with Bank Boston, N.A. ("BankBoston") pursuant to
which Investors Bank has agreed to purchase (the "Acquisition") from
BankBoston substantially all of the assets of BankBoston solely relating to
BankBoston's domestic institutional trust and custody business (the
"Business").
22
<PAGE>
The Business currently provides master trust and custody services to
endowments, pension funds, municipalities, mutual funds and other financial
institutions, primarily in New England. As of June 30,1998, the Business
serviced approximately $45 billion in assets held in over 3,000 accounts by
almost 600 clients. The primary focus of the Business is small to midsize
custody accounts ranging in size from $5 million to $500 million in assets.
The aggregate purchase price (the "Purchase Price") to be paid by
Investors Bank for the Business is approximately $50 million. A deposit of $1
million was made by Investors Bank upon the signing of the Agreement and may
be retained by BankBoston if Investors Bank fails to close the Acquisition
after receipt of necessary regulatory approvals. An additional $43 million
plus the amount of accounts receivable of the Business at the time of the
closing of the Acquisition (the "Closing") will be paid at Closing. Investors
Bank will pay up to an additional $6 million to BankBoston based upon the
level of client retention at the one year anniversary of the Closing.
The Acquisition is expected to be accounted for as a purchase. While
Investors Bank is able to fund the transaction from internal resources, the
Company intends to use the proceeds of an equity offering to partially fund
the transaction. The Company intends to complete the equity offering during
the third quarter of 1998. The Company expects the Acquisition to be
accretive to earnings per share after the successful integration of staff,
systems and facilities in 1999.
The Closing is subject to customary closing conditions, the expiration
or early termination of the applicable waiting period under the Hart-Scott
Rodino Act and certain regulatory approvals. Subject to the satisfaction of
the foregoing conditions, Investors Bank expects the Closing to occur on or
about September 30, 1998.
The Company believes that its knowledge and experience in the custody
business, as well as its core strategy of providing superior client service,
will be an excellent fit for the clients of the Business. The Company
currently provides to its customers all of the services that BankBoston
provides to the clients of the Business. In addition, the Company's focus on
custody and related services allows it to dedicate its resources to providing
state-of-the-art technology solutions and highly trained and experienced
professionals to the Business.
The Company also believes that it will benefit from the added depth and
diversity in its client base as a result of the Acquisition. The Company
believes that the Acquisition will provide potential cross-selling
opportunities for the provision of additional, value-added services such as
securities lending, foreign exchange and cash management. In addition, the
Company believes that it will eventually recognize some operating
efficiencies from the complementary nature of the Business in relation to the
Company's own services.
In connection with the Acquisition, on July 17, 1998 Investors Bank and
BankBoston also entered into an Outsourcing Agreement (the "Outsourcing
Agreement"). Pursuant to the Outsourcing Agreement, effective upon the
Closing, the Company will act as custodian for three BankBoston asset
management related businesses comprising approximately $25 billion in assets:
domestic private banking, institutional asset management and international
private banking. The Company will provide transaction processing and asset
safekeeping and servicing to the clients of those businesses.
AMT Capital Acquisition
- -----------------------
On May 29, 1998, the Company acquired (the "AMT Acquisition") all of
the outstanding share capital of AMT Capital Services, Inc. and AMT Capital
Advisers, Inc. (collectively, "AMT Capital"), pursuant to an Agreement and
Plan of Merger dated as of May 12, 1998 (the "Merger Agreement"), by and
among the Company, Investors Acquisition Sub I, Inc., Investors Acquisition
Sub II, Inc., AMT Capital and certain stockholders of AMT Capital (the
"Former AMT Capital Stockholders") in exchange for 194,006 shares of the
Company's Common Stock. Of the 194,006 shares of Common Stock issued to the
Former AMT Capital Stockholders, 18,938 shares are being held in escrow by
First Chicago Trust Company of New York as escrow agent pursuant to an Escrow
Agreement dated as of May 29, 1998 among the Company, the Former AMT Capital
Stockholders and the escrow agent (the "Escrow Agreement") until the earlier
of (i) February 28, 1999 and (ii) the Company's first public announcement of
earnings following completion by the Company's independent public accountants
of the first full-year audit of the Company's financial statements following
May 29, 1998 to cover any reimbursable claims relating to the AMT
Acquisition. The remaining 175,068 shares
23
<PAGE>
acquired by the Former AMT Capital Stockholders pursuant to the AMT
Acquisition were registered on a Registration Statement on Form S-3 (File No.
333-58031), declared effective on July 9, 1998, and may be sold to the public
by the Former AMT Capital Stockholders. The AMT Acquisition has been
accounted for under the "pooling-of-interests" method and was structured as a
tax-free reorganization under the Internal Revenue Code.
AMT Capital is a New York-based firm recognized for providing fund
administration services to global and domestic institutional investment
management firms. The AMT Acquisition is intended to enhance the Company's
offerings to institutional investment managers who outsource the
administration of pooled investment products. Additionally, the combination
of the substantial expertise at both the Company and AMT Capital should
further strengthen the Company's strategic product development capabilities
in support of clients worldwide. Upon the consummation of the AMT
Acquisition, the AMT Capital companies were renamed Investors Capital
Services, Inc. and Investors Capital Advisors, Inc., respectively.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the Securities
and Exchange Commission (including this Form 10-Q) may contain statements
which are not historical facts, so-called "forward-looking statements," and
which involve risks and uncertainties. The Company's actual future results
may differ significantly from those stated in any forward-looking statements.
Factors that may cause such differences include, but are not limited to, the
factors discussed below. Each of these factors, and others, are discussed
from time to time in the Company's filings with the Securities and Exchange
Commission.
The Company's future results may be subject to substantial risks and
uncertainties. Because certain fees charged by the Company for its services
are based on the market values of assets processed, such fees and the
Company's quarterly and annual operating results are sensitive to changes in
interest rates, declines in stock market values, and investors seeking
alternatives to 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.
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. In addition, the Year
2000 issue discussed below may affect the Company's operations. 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.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or
24
<PAGE>
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
In late 1997 the Company, with the assistance of an outside consultant,
completed a detailed assessment of the Company's Year 2000 compliance status.
As part of the assessment process, the Company also developed project plans
for application renovation and testing. Based on this assessment, the Company
determined that it will be required to modify or upgrade portions of its
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications to,
or upgrades of, existing software, the Year 2000 Issue can be mitigated.
However, if such modifications and upgrades are not made, or are not
completed in a timely manner, the Year 2000 Issue could have a material
impact on the operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate their
own Year 2000 Issue. The Company's total Year 2000 project cost and estimates
to complete include the estimated costs and time associated with the impact
of a third party's Year 2000 Issue, and are based on presently available
information. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the company's systems, would not have a material adverse
effect on the Company.
The Company will utilize both internal and external resources to modify
or upgrade existing software and to test such software for Year 2000
compliance. The Company plans to complete the Year 2000 project, including
all testing, by December 31, 1998. Currently, the Company is completing
renovation of software code and has commenced the testing phase of the Year
2000 project. The Company is currently developing contingency plans to
address any failure by the Company or any third party with which the Company
interacts to properly and/or completely renovate software code for Year 2000
compliance. The Company expects to complete these contingency plans in the
fourth quarter of 1998.
The remaining 1998 cost of the Year 2000 project is estimated at
$753,000, which will be expensed as incurred over the next six months, and is
being funded through operating cash flows. In addition, the Company has
budgeted up to an additional $400,000 for Year 2000 costs that may arise
during 1999. These 1999 costs may include, but are not limited to, testing
with third parties who are not Year 2000 compliant prior to December 31, 1998
and software renovation necessitated by internal and/or third-party testing
during 1998 and 1999. These amounts are not expected to have a material
effect on the Company's results of operations. To date, the Company has
incurred and expensed approximately $847,000 related to the assessment of,
and remediation efforts in connection with, its Year 2000 project and the
development of a remediation plan.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially
from those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
code, the compatibility of third-party interfaces, and similar uncertainties.
25
<PAGE>
Statement of Operations
Comparison of Operating Results for the Six Months Ended June 30, 1997 and
1998
Noninterest Income
Noninterest income increased $7,711,000 to $46,235,000 for the six
months ended June 30, 1998 from $38,524,000 for the six months ended June 30,
1997. Noninterest income consists of the following items:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------------------------------------
1997 1998 Change
--------------- -------------- -----------------
<S> <C> <C> <C>
(Dollars in thousands)
Asset administration fees $ 36,862 $ 45,023 22%
Computer service fees 339 273 (19)
Other operating income 1,316 468 (64)
Gain on sale of securities 7 471 -
--------------- --------------
Total Noninterest Income $ 38,524 $ 46,235 20
--------------- --------------
--------------- --------------
</TABLE>
Asset administration fees increased $8,161,000 to $45,023,000 for the
six months ended June 30, 1998 compared to $36,862,000 for the six months
ended June 30, 1997. The Company earns these fees on assets processed by the
Company on behalf of a variety of financial asset managers. 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 $164
billion at June 30, 1998 from $146 billion at June 30, 1997. Of this $18
billion net increase in assets processed, approximately 29% of the increase
reflects assets processed for new clients, and the remainder of the increase
reflects growth of assets processed for existing clients. The largest
component of asset administration fees is asset-based fees, which increased
between periods due to the increase in assets processed. Another significant
portion of the increase in asset administration fees resulted from the
Company's success in marketing ancillary services such as securities lending
and foreign exchange.
Computer service fees consist of amounts charged by the Company for
data processing services related to client accounts. The decrease in computer
service fees is related to renegotiations of contracts performed by Investors
Capital Services in 1998. Other operating income consists of dividends
received relating to the FHLBB stock investment and miscellaneous
transaction-oriented private banking fees. The decrease in other operating
income was due to a decrease in services provided by Investors Capital
Advisors, a wholly owed subsidiary of Investors Capital Services, Inc. Gain
on sale of securities increased during the first six months of 1998 due to
the Company's sale of certain mortgage-backed securities in anticipation of
increased prepayment risk.
26
<PAGE>
Operating Expenses
Total operating expenses increased by $6,013,000 to $47,242,000 for the
six months ended June 30, 1998 compared to $41,229,000 for the six months
ended June 30, 1997. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the Six Months
Ended
June 30,
-------------------
1997 1998 Change
-------- ------- ------
<S> <C> <C> <C>
(Dollars in thousands)
Compensation and benefits $24,845 $29,347 18%
Technology and telecommunications 5,189 5,322 3
Transaction processing services 3,902 3,962 2
Occupancy 2,314 3,418 48
Depreciation and amortization 922 1,270 38
Travel and sales promotion 799 1,003 26
Professional fees 1,146 788 (31)
Insurance 374 392 5
Other operating expenses 1,738 1,740 --
-------- -------
Total Operating Expenses $41,229 $47,242 15 %
-------- -------
-------- -------
</TABLE>
Compensation and benefits expense increased by $4,502,000 or 18% from
period to period due to several factors. The average number of employees
increased 20% to 1,068 during the six months ended June 30, 1998 from 890
during the same period in 1997. This increase relates primarily to the
increase in client relationships and to the expansion of existing client
relationships during the period. Effective January 1, 1998 the Company
adopted the accounting method promulgated by Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," ("SOP 98-1"). SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use.
Accordingly, the Company capitalized $318,000 of compensation and
compensation-related expenses for employees who were directly associated with
internal use computer software projects during the six months ended June 30,
1998.
Occupancy expense increased $1,104,000 to $3,418,000 for the six months
ended June 30, 1998 from $2,314,000 for the six months ended June 30, 1997.
The increase resulted from the expansion into additional office space in the
Company's Boston, Toronto and Dublin offices.
Depreciation and amortization expense increased $348,000 between
periods due to purchases of furniture, equipment, and capitalized software
throughout 1997 and the first six months of 1998.
Travel and sales promotion expense increased $204,000 to $1,003,000 for
the six months ended June 30, 1998 from $799,000 for the six months ended
June 30, 1997 due to increased travel by the sales and marketing
professionals.
Professional fees decreased $358,000 to $788,000 for the six months
ended June 30, 1998 from $1,146,000 for the six months ended June 30, 1997.
The decrease in professional fees relates to non-recurring consulting and
legal fees incurred in the first six months of 1997.
27
<PAGE>
Net Interest Income
Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the
volume of interest-earning assets or interest-bearing liabilities or changes
in interest rates for the six months ended June 30, 1998 compared to the same
period in 1997.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
---------------- -------------- ------------
<S> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets
Fed funds sold and
interest-earning deposits $ (199) $ 74 $ (125)
Investment securities 11,932 (2,056) 9,876
Loans 38 137 175
---------------- -------------- ------------
Total interest-earning assets 11,771 (1,845) 9,926
---------------- -------------- ------------
Interest-bearing liabilities
Deposits 3,210 (245) 2,965
Borrowings 6,608 483 7,091
---------------- -------------- ------------
Total interest-bearing liabilities 9,818 238 10,056
---------------- ------------- ------------
Change in net interest income $ 1,953 $ (2,083) $ (130)
---------------- ------------- ------------
---------------- ------------- ------------
</TABLE>
Net interest income decreased $130,000 or 1% to $12,916,000 for the six
months ended June 30, 1998 from $13,046,000 for the same period in 1997. This
net decrease resulted from an increase in interest income of $9,926,000
offset by an increase in interest expense of $10,056,000. The net impact of
the above changes was a 76 basis point decrease in net interest margin.
Interest expense increased due primarily to a $385,000,000 increase in
average deposits and short term borrowings for the six months ended June 30,
1998 compared to the same period in 1997. Also, to a lesser extent, interest
expense increased due to an increase in the average interest rate paid by the
Company from 4.93% to 5.03% during the period.
Income Taxes
The Company's earnings were taxed on the federal level at 35% for the
1998 and 1997 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% in 1997 and 10.91% in 1998.
The provision for income taxes for the six months ended June 30, 1998
increased by $793,000 compared to the same period in 1997. The overall
effective tax rate increased to 36.78% for the six months ended June 30,
1998, from 34.69% for the same period in 1997. The increse in the effective
tax rate is due to the change in tax status of Investors Capital Services,
Inc., AMT Capital Services, Inc. was a Subchapter S corporation which
incurred no federal or state tax on net income through May 29, 1997.
28
<PAGE>
Statement of Operations
Comparison of Operating Results for the Quarters Ended June 30, 1997 and 1998
Noninterest Income
Noninterest income increased $4,390,000 to $24,022,000 for the quarter
ended June 30, 1998 from $19,632,000 for the quarter ended June 30, 1997.
Noninterest income consists of the following items:
<TABLE>
<CAPTION>
For the Quarters Ended
June 30,
-------------------------------------------------------
1997 1998 Change
--------------- -------------- -----------------
<S> <C> <C> <C>
(Dollars in thousands)
Asset administration fees $ 18,844 $ 23,335 24%
Computer service fees 180 139 (23)
Other operating income 601 277 (54)
Gain on sale of securities 7 271 -
--------------- --------------
Total Noninterest Income $ 19,632 $ 24,022 22%
--------------- --------------
--------------- --------------
</TABLE>
Asset administration fees increased $4,491,000 to $23,335,000 for the
quarter ended June 30, 1998 compared to $18,844,000 for the quarter ended
June 30, 1997. The Company earns these fees on assets processed by the
Company on behalf of a variety of financial asset managers. 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 $164
billion at June 30, 1998 from $146 billion at June 30, 1997. Of this $18
billion net increase in assets processed, approximately 29% of the increase
reflects assets processed for new clients, and the remainder of the increase
reflects growth of assets processed for existing clients. The largest
component of asset administration fees is asset-based fees, which increased
between periods due to the increased between periods due to the increase in
assets processed.
The decrease in computer service fees between periods relates to
renegotiations of contracts performed by Investors Capital Services in 1998.
The overall decrease in other operating income was due to a decrease in
services provided by Investors Capital Advisors, Inc. a wholly owned
subsidiary of Investors Capital Services. Gain on sale of securities
increased during the first three months of 1998 due to the Company's sale of
certain mortgage-backed securities in anticipation of increased prepayment
risk.
29
<PAGE>
Operating Expenses
Total operating expenses increased by $2,588,000 to $23,565,000 for the
quarter ended June 30, 1998 compared to $20,977,000 for the quarter ended
June 30, 1997. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
-------------------- ------
1997 1998 Change
------- ------- ------
<S> <C> <C> <C>
(Dollars in thousands)
Compensation and benefits $12,686 $14,679 16%
Technology and telecommunications 2,704 2,715 --
Transaction processing services 1,865 1,931 4
Occupancy 1,189 1,731 46
Depreciation and amortization 517 669 29
Travel and sales promotion 463 586 27
Professional fees 539 522 (3)
Insurance 188 199 6
Other operating expenses 826 533 (35)
------- -------
Total Operating Expenses $20,977 $23,565 12%
------- -------
------- -------
</TABLE>
Compensation and benefits expense increased by $1,993,000 or 16% from
period to period due to several factors. The average number of employees
increased 17% to 1,078 during the quarter ended June 30, 1998 from 920 during
the same period in 1997. This increase relates primarily to the increase in
client relationships and to the expansion of existing client relationships
during the period. Effective January 1, 1998 the Company adopted SOP 98-1
which provides guidance on accounting for the costs of computer software
developed or obtained for internal use. Accordingly, the Company capitalized
$170,000 of compensation and compensation-related expenses for employees who
were directly associated with internal use computer software projects during
the quarter ended June 30, 1998.
Occupancy expense increased $542,000 to $1,731,000 for the quarter
ended June 30, 1998 from $1,189,000 for the quarter ended June 30, 1997. The
increase resulted from the expansion into additional office space in the
Company's Boston, Toronto and Dublin offices.
Depreciation and amortization expense increased $152,000 between
periods due to purchases of furniture, equipment, and capitalized software
throughout 1997 and the first six months of 1998.
Travel and sales promotion expense increased $123,000 to $586,000 for
the quarter ended June 30, 1998 from $463,000 for the quarter ended June 30,
1997 due to increased travel of the sales and marketing professionals.
Other operating expenses include fees for office supplies expense,
recruiting costs, and temporary help. These expenses decreased $293,000 to
$533,000 for the quarter ended June 30, 1998 from $826,000 for the quarter
ended June 30, 1997. Recruiting costs and costs of temporary help decreased
as a result of a change in strategy of using interns instead of hiring
outside manpower. The majority of the decrease related to efficiencies
experienced in general operating expenses.
30
<PAGE>
Net Interest Income
Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the
volume of interest-earning assets or interest-bearing liabilities or changes
in interest rates for the quarter ended June 30, 1998 compared to the same
period in 1997.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
---------------- -------------- ------------
<S> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets
Fed funds sold and
interest-earning deposits $ 202 $ - $ 202
Investment securities 4,983 (1,379) 3,604
Loans 123 48 171
---------------- -------------- ------------
Total interest-earning assets 5,308 (1,331) 3,977
---------------- -------------- ------------
Interest-bearing liabilities
Deposits 1,882 (122) 1,760
Borrowings 2,862 153 3,015
---------------- -------------- ------------
Total interest-bearing liabilities 4,744 31 4,775
---------------- -------------- ------------
Change in net interest income $ 564 $ (1,362) $ (798)
---------------- -------------- ------------
---------------- -------------- ------------
</TABLE>
Net interest income decreased $798,000 or 12% to $5,792,000 for the
quarter ended June 30, 1998 from $6,590,000 for the same period in 1997. This
net decrease resulted from an increase in interest income of $3,977,000
offset by an increase in interest expense of $4,775,000. The net impact of
the above changes was a 88 basis point decrease in net interest margin.
Interest expense increased due primarily to a $371,000,000 increase in
average deposits and short term borrowings for the quarter ended June 30,
1998 compared to the same period in 1997. Also, to a lesser extent, interest
expense increased due to an increase in the average interest rate paid by the
Company from 5.05% to 5.08% during the period.
Income Taxes
The Company's earnings were taxed on the federal level at 35% for the 1998
and 1997 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% in 1997 and 10.91% in 1998.
The provision for income taxes for the quarter ended June 30, 1998 increased
by $563,000 compared to the same period in 1997. The overall effective tax
rate increased to 37.17% for the quarter ended June 30, 1998, from 33.55% for
the same period in 1997. The increase in the effective tax rate is due to the
Company's acquisition of AMT Capital Services, Inc. Prior to the acquisition,
AMT Capital Services, Inc. was taxed as a Subchapter S corporation and did
not incur federal or state tax on its net income.
31
<PAGE>
Financial Condition
Investment Portfolio
The following table summarizes the Company's investment portfolio as of the
dates indicated:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------------- --------------
(Dollars in thousands)
<S> <C> <C>
Securities held to maturity:
State and political subdivisions $ 35,225 $ 35,518
Mortgage-backed securities 590,365 733,121
Federal agency securities 168,687 178,766
Foreign government securities 7,769 7,738
------------------ ----------------
Total securities held to maturity $ 802,046 $ 955,143
------------------ ----------------
------------------ ----------------
Securities available for sale:
Municipal bonds $ 8,382 $ 39,217
U.S. Treasury securities 30,092 10,045
Mortgage-backed securities 424,376 362,819
Federal agency securities - 28,598
Corporate debt - 49,070
------------------ ----------------
Total securities available for sale $ 462,850 $ 489,749
------------------ ----------------
------------------ ----------------
</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
comprised 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"), Federal
agency callable bonds issued by FHLMC and the FHLBB, municipal securities,
corporate debt 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.
32
<PAGE>
The Company invests in corporate debt in order to increase the total
return of the investment portfolio. Corporate debt has credit risk resulting
from the possibility that the underlying holding company may be unable to meet
the terms of the security.
The book value and weighted average yield of the Company's securities held
to maturity at June 30, 1998, by effective maturity, are reflected in the
following table:
<TABLE>
<CAPTION> Weighted
Book Average
Value Yield
---------------- ---------------
<S> <C> <C>
(Dollars in thousands)
Due from one to five years $ 310,847 6.55%
Due from five years up to ten years 189,393 6.51%
Due after ten years 454,903 6.30%
------------------
Total securities held to maturity $ 955,143
------------------
------------------
</TABLE>
The book value and weighted average yield of the Company's securities
available for sale at June 30, 1998, by effective maturity, are reflected in
the following table:
<TABLE>
<CAPTION>
Weighted
Book Average
Value Yield
----------------- ---------------
<S> <C> <C>
(Dollars in thousands)
Due within one year $ 10,045 6.20%
Due from one to five years 346,831 6.32%
Due from five years up to ten years 66,786 5.67%
Due after ten years 66,087 6.38%
-------------------
Total securities available for sale $ 489,749
-------------------
-------------------
</TABLE>
The maturities of mortgage backed securities have been allocated in the above
tables as described in Note 3 of the Notes to Condensed Consolidated Financial
Statements.
33
<PAGE>
Loan Portfolio
The following table summarizes the Company's loan portfolio as of the dates
indicated:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------------ ------------------
<S> <C> <C>
(Dollars in thousands)
Loans to individuals $ 26,858 $ 20,086
Loans to not-for-profit organizations 13 13
Loans to mutual funds 29,174 49,790
------------------ ------------------
56,045 69,889
Less: allowance for loan losses (100) (100)
------------------ ------------------
Net loans $ 55,945 $ 69,789
------------------ ------------------
------------------ ------------------
Floating rate $ 55,932 $ 69,776
Fixed rate 13 13
------------------ ------------------
$ 55,945 $ 69,789
------------------ ------------------
------------------ ------------------
</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. At June 30, 1998, 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 June 30, 1998, 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'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 June 30, 1998, there were no past
due loans, troubled debt restructurings, or any loans on non-accrual 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 June 30, 1998. 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 interest-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 interest-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 interest-earning asset with a specific
interest-bearing liability. Instead, as shown in the table below, it
aggregates all of its interest-earning assets and interest-bearing
liabilities to determine the difference between these in specific time
34
<PAGE>
frames. This difference is known as the rate-sensitivity gap. A positive gap
indicates that more interest-earning assets than interest-bearing liabilities
reprice 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 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.
35
<PAGE>
The following table presents the repricing schedule for the Company's
interest-earning assets and interest-bearing liabilities at June 30, 1998:
<TABLE>
<CAPTION>
Over
Over One
Over Six Year
Within Three to to Over
Three to Six Twelve Five Five
Months Months Months Years Years Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest earning assets (1):
Federal funds sold $ 35,000 $ -- $ -- $ -- $ -- $ 35,000
Investment securities (2) 603,903 178,132 205,170 351,447 106,241 1,444,893
Loans--fixed rate 69,776 -- -- -- -- 69,776
Loans--variable rate -- -- -- 13 -- 13
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets 708,679 178,132 205,170 351,460 106,241 1,549,682
Interest bearing liabilities:
Demand deposit accounts 152,370 -- -- -- -- 152,370
Savings accounts 548,808 -- -- -- -- 548,808
Interest rate contracts (370,000) 50,000 110,000 210,000 -- --
Short term borrowings 561,846 -- -- -- -- 561,846
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 893,024 50,000 110,000 210,000 1,263,024
---------- ---------- ---------- ---------- ---------- ----------
Net interest sensitivity gap during
the period $ (184,345) $ 128,132 $ 95,170 $ 141,460 $ 106,241 $ 286,658
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Cumulative gap $ (184,345) $ (56,213) $ 38,957 $ 180,417 $ 286,658
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Interest sensitive assets as a percent of
interest sensitive liabilities (cumulative) 79.36% 94.04% 103.70% 114.28% 122.70%
Interest sensitive assets as a percent of total
assets (cumulative) 43.12% 53.95% 66.44% 87.82% 94.28%
Net interest sensitivity gap as a percent of
total assets (11.22%) 7.80% 5.79% 8.61% 6.46%
Cumulative gap as a percent of total assets (11.22%) (3.42%) 2.37% 10.98% 17.44%
</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.
36
<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, new deposits, short term borrowings,
interest payments on securities held to maturity and available for sale, fees
collected from asset administration clients. 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 $.12 per share.
The Company's ability to pay dividends on the Common Stock depends on the
receipt of dividends from the Bank. In addition, the Company may not pay
dividends on its Common Stock if it is in default under certain agreements
entered into in connection with the sale of the Capital Securities. Any
dividend payments by the Bank are subject to certain restrictions imposed by
the Massachusetts Commissioner of Banks. Subject to regulatory requirements,
the Bank 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 $.12 per share of the Company's outstanding Common Stock
(approximately $804,230 based upon 6,701,915 shares outstanding as of June
30, 1998).
At June 30, 1998, cash and cash equivalents were 2% of total assets. At
June 30, 1998, approximately $10 million or 1% 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 as of June 30, 1998 was $176 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 at June 30,
1998 was $1.3 billion.
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 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 the Company borrows under this
arrangement, the Company is required to hold FHLBB stock equal to 5% of such
outstanding advances. The aggregate amount of borrowing available to the
Company under this arrangement at June 30, 1998 was $752 million.
37
<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. The Company's capital expenditures
have been incurred and its microcomputer leases entered into on an
as-required basis. As a result, the Company's capital expenditures were
$2,782,403 and $2,295,832 for the six months ended June 30, 1997 and 1998,
respectively.
Stockholders' equity at June 30, 1998 was $81,772,000, an increase of
$6,059,000 or 8%, from $75,713,000 at December 31, 1997. The ratio of
stockholders' equity to assets decreased to 4.97% at June 30, 1998 from 5.18%
at December 31, 1997 due to the significant increase in assets.
As described under "Recent and Pending Acquisitions", the Company intends
to complete an equity offering of its Common Stock during the third quarter
of 1998. The Company expects to generate gross proceeds of approximately
$25-$30 million in the offering.
The Federal Reserve Board has adopted a system using internationally
consistent risk-based capital adequacy guidelines to evaluate the capital
adequacy of banks and bank holding companies. Under the risk-based capital
guidelines, different categories of assets are assigned different risk
weights, based generally upon the perceived credit risk of the asset. These
risk weights are multiplied by corresponding asset balances to determine a
"risk-weighted" asset base. Certain off-balance sheet items, which previously
were not expressly considered in capital adequacy computations, are added to
the risk-weighted asset base by converting them to a balance sheet equivalent
and assigning them the appropriate risk weight.
Federal Reserve Board and FDIC guidelines require that banking
organizations have a minimum ratio of total capital to risk-adjusted assets
and off balance sheet items of 8.0%. Total capital is defined as the sum of
"Tier I" and "Tier II" capital elements, with at least half of the total
capital required to be Tier I. Tier I capital includes, with certain
restrictions, the sum of common stockholders' equity, noncumulative perpetual
preferred stock, a limited amount of cumulative perpetual preferred stock,
and minority interests in consolidated subsidiaries, less certain intangible
assets. Tier II capital includes, with certain limitations, subordinated debt
meeting certain requirements, intermediate-term preferred stock, certain
hybrid capital instruments, certain forms of perpetual preferred stock, as
well as maturing capital instruments and general allowances for loan losses.
The following table summarizes the Company's Tier I and total capital
ratios at June 30, 1998:
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------
Amount Ratio
-------------- ---------------
<S> <C> <C>
(Dollars in thousands)
Tier I capital $ 105,511 22.87%
Tier I capital minimum requirement 18,454 4.00%
-------------- ---------------
Excess Tier I capital $ 87,057 18.87%
-------------- ---------------
-------------- ---------------
Total capital $ 105,611 22.89%
Total capital minimum requirement 36,909 8.00%
-------------- ---------------
Excess Total capital $ 68,702 14.89%
-------------- ---------------
-------------- ---------------
Risk adjusted assets, net of intangible assets $ 461,361
--------------
--------------
</TABLE>
38
<PAGE>
The following table summarizes the Bank's Tier I and total capital ratios at
June 30, 1998:
<TABLE>
<CAPTION>
June 30, 1998
------------------------
Amount Ratio
--------- -------
<S> <C> <C>
(Dollars in thousands)
Tier I capital $102,688 22.33%
Tier I capital minimum requirement 18,397 4.00%
-------- ------
Excess Tier I capital $ 84,291 18.33%
-------- ------
-------- ------
Total capital $102,788 22.35%
Total capital minimum requirement 36,794 8.00%
-------- ------
Excess Total capital $ 65,994 14.35%
-------- ------
-------- ------
Risk adjusted assets, net of intangible assets $459,927
--------
--------
</TABLE>
In addition to the risk-based capital guidelines, the Federal Reserve Board
and the FDIC use a "Leverage Ratio" as an additional tool to evaluate capital
adequacy. The Leverage Ratio is defined to be a company's Tier I capital divided
by its adjusted total assets. The Leverage Ratio adopted by the federal banking
agencies requires a ratio of 3.0% Tier I capital to adjusted average total
assets for top rated banking institutions. All other banking institutions will
be expected to maintain a Leverage Ratio of 4.0% to 5.0%. The computation of the
risk-based capital ratios and the Leverage Ratio requires that the capital of
the Company be reduced by most intangible assets. The Company's Leverage Ratio
at June 30, 1998 was 6.96%, which is in excess of regulatory requirements. The
Bank's Leverage Ratio at June 30, 1998 was 6.78%, which is also in excess of
regulatory requirements.
39
<PAGE>
The following tables present average balances, interest income and
expense, and yields earned or paid on the major categories of assets and
liabilities for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997 Six Months Ended June 30, 1998
------------------------------------------ --------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------------- ------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) (Dollars in thousands)
Interest earning assets
Federal funds sold and securities
purchased under resale agreements $ 31,586 $ 844 5.34% $ 24,961 $ 719 5.76%
Investment securities 914,752 29,840 6.52% 1,317,464 39,716 6.03%
Loans 57,915 1,340 4.63% 59,506 1,515 5.09%
-------------- ------------- ------------ -------------- -------------- -------------
Total interest earning assets 1,004,253 32,024 6.38% 1,401,931 41,950 5.98%
------------- ------------ -------------- -------------
Allowance for loan losses (100) (100)
Noninterest-earning assets 62,266 84,121
-------------- --------------
Total assets $ 1,066,419 $ 1,485,952
-------------- --------------
-------------- --------------
Interest bearing liabilities
Deposits:
Demand $ 121,003 $ 2,965 4.90% $ 192,611 $ 4,830 5.02%
Savings 269,880 6,484 4.81% 331,432 7,572 4.57%
Time 472 11 4.66% 870 23 5.29%
Short term borrowings 378,790 9,518 5.03% 630,376 16,609 5.27%
-------------- ------------- ------------ -------------- -------------- -------------
Total interest bearing liabilities 770,145 18,978 4.93% 1,155,289 29,034 5.03%
------------- ------------ -------------- -------------
Noninterest bearing liabilities
Demand deposits 147,708 148,683
Noninterest bearing time
deposits 51,298 65,000
Other liabilities 11,870 14,784
-------------- --------------
Total liabilities 981,021 1,383,756
Trust preferred stock 20,331 24,167
Equity 65,067 78,029
-------------- --------------
Total liabilities and equity $ 1,066,419 $ 1,485,952
-------------- --------------
-------------- --------------
Net interest income $ 13,046 $ 12,916
------------- ------------
------------- ------------
Net interest margin (1) 2.60% 1.84%
------------ ----------
------------ ----------
Average interest rate spread (2) 1.45% 0.95%
------------ ----------
------------ ----------
Ratio of interest-earning assets to
interest-bearing liabilities 130.40% 121.35%
------------ ----------
------------ ----------
</TABLE>
1) Net interest income divided by total interest-earning assets.
2) Yield on interest-earning assets less rate paid on interest-bearing
liabilities.
40
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Stockholders was held on April 14, 1998.
b. No information provided due to inapplicability of item.
c. A vote was proposed to (1) elect Kevin J. Sheehan, James M. Oates
and Thomas P. McDermott, current directors of the Company, as
Class III Directors of the Company to serve for a three year term;
(2) to consider and act upon a proposal to approve the Company's
Amended and Restated 1995 Stock Plan; and (3) ratify the selection
of Deloitte & Touche LLP as independent accountants for the Company
for the fiscal year ending December 31, 1998.
The voting results are as follows:
<TABLE>
<CAPTION>
Votes Votes Broker
Matter Votes For Against Withheld Abstained
------ --------- -------- -------- ---------
<S> <C> <C> <C> <C>
(1) Kevin J. Sheehan 5,098,147 N/A 14,165 N/A
James M. Oates 5,103,133 N/A 9,179 N/A
Thomas P. McDermott 5,106,326 N/A 5,986 N/A
(2) Amended and Restated 2,245,849 1,831,939 N/A 154,186
1995 Stock Plan
(3) Deloitte & Touche 5,101,833 2,179 N/A 8,300
</TABLE>
d. No information provided due to inapplicability of item.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits.
Exhibit No. Description
4.1 Amendment No. 1 to Rights Agreement by and
between the Company and First Chicago Trust
Company of New York, as Rights Agent, dated
June 17, 1998
11 Statement of Computation of Earnings per
Share (included herein on page 16)
27 Financial Data Schedules
(b) On July 20, 1998, the Company made a voluntary filing of a Current
Report on Form 8-K with respect to the acquisition by Investors
Bank & Trust Company of the domestic institutional trust and custody
business of BankBoston, N.A.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVESTORS FINANCIAL SERVICES CORP.
Date: August 14, 1998 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)
42
<PAGE>
EXHIBIT 4.1
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
This Amendment No. 1 to Rights Agreement ("Amendment No. 1") is made by
and between Investors Financial Services Corp., a Delaware corporation (the
"Company"), and First Chicago Trust Company of New York, as Rights Agent (the
"Rights Agent") as of the 17th day of June, 1998. Reference is made to the
Rights Agreement dated as of September 25, 1995 (the "Agreement") between the
parties. Capitalized terms not defined herein shall have the respective meaning
ascribed to them in the Agreement.
In accordance with Section 27 of the Agreement, the Company hereby
amends the Agreement as follows:
1. Effective immediately, the Rights Agreement is hereby amended to (i)
delete all references to "Continuing Director" or "Continuing Directors" and
insert in place thereof "Director" or "Directors", as appropriate; (ii) delete
Section 1(o) in its entirety and replace Section 1(o) with the following: "(o)
"Director" shall mean any member of the Board, and "Directors" shall mean the
members of the Board."; (iii) change the notice address for the Company set
forth in Section 26 to Investors Financial Services Corp., P.O. Box 9130,
Boston, MA 02117-9130; and (iv) delete from Section 29 in each place that it
appears the phrase "(with, where specifically provided for herein, the
concurrence of the Continuing Directors)".
2. Effective immediately, the Form of Rights Certificate attached to
the Agreement as Exhibit B is hereby amended (i) to add, immediately following
the words "the Rights Agreement, dated as of September 25, 1995" in the first
paragraph, the words ", as amended"; and (ii) to delete in its entirety the
second sentence of the seventh paragraph "Under certain circumstances set forth
in the Rights Agreement, the decision to redeem shall require the concurrence of
a majority of the Continuing Directors.".
3. Except as specifically amended and set forth herein, the Agreement
shall remain unchanged and in full force and effect in accordance with its
terms.
4. By execution of this Amendment No. 1, the Company hereby certifies
to the Rights Agent that the amendments to the Agreement reflected herein comply
with Section 27 of the Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1
to be executed and delivered as of the date first written above.
INVESTORS FINANCIAL SERVICES CORP.
By: /s/ Kevin J. Sheehan
------------------------------------
Kevin J. Sheehan
President, Chief Executive Officer and Chairman
FIRST CHICAGO TRUST COMPANY OF
NEW YORK
By: /s/ Jane Gorostiola
------------------------------------
Name: Jane Gorostiola
Title: Assistant Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 APR-01-1997 JUL-01-1997
<PERIOD-END> DEC-31-1997 MAR-01-1997 JUN-30-1997 SEP-30-1997
<CASH> 17,298,566 23,089,795 9,700,841 25,205,303
<INT-BEARING-DEPOSITS> 0 0 0 0
<FED-FUNDS-SOLD> 75,000,000 0 63,000,000 0
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 462,850,089 304,235,614 324,279,512 460,281,597
<INVESTMENTS-CARRYING> 802,046,077 652,449,979 716,907,576 749,448,367
<INVESTMENTS-MARKET> 809,708,389 648,999,683 719,500,877 757,781,734
<LOANS> 56,044,957 76,708,227 102,527,199 47,503,504
<ALLOWANCE> 100,000 100,000 100,000 100,000
<TOTAL-ASSETS> 1,460,446,776 1,095,336,047 1,257,865,445 1,332,482,156
<DEPOSITS> 846,739,932 623,790,739 740,951,179 551,694,613
<SHORT-TERM> 499,932,628 365,181,507 409,123,917 672,444,111
<LIABILITIES-OTHER> 13,899,936 16,882,965 14,554,103 11,912,498
<LONG-TERM> 0 0 0 0
24,161,104 24,244,743 24,216,332 24,166,257
0 0 0 0
<COMMON> 66,643 66,806 66,395 66,395
<OTHER-SE> 75,646,533 65,169,287 68,953,520 72,198,282
<TOTAL-LIABILITIES-AND-EQUITY> 1,460,446,776 1,095,336,047 1,257,865,445 1,332,482,156
<INTEREST-LOAN> 2,566,321 664,409 675,886 570,264
<INTEREST-INVEST> 70,469,608 14,367,193 16,316,033 18,547,320
<INTEREST-OTHER> 0 0 0 0
<INTEREST-TOTAL> 73,035,929 15,031,602 16,991,919 19,117,584
<INTEREST-DEPOSIT> 18,722,500 4,445,602 5,014,000 4,408,706
<INTEREST-EXPENSE> 46,863,231 8,575,466 10,402,357 13,020,232
<INTEREST-INCOME-NET> 26,172,698 6,456,136 6,589,562 6,097,352
<LOAN-LOSSES> 0 0 0 0
<SECURITIES-GAINS> 113,958 0 7,110 34,650
<EXPENSE-OTHER> 87,362,391 20,252,299 20,976,977 21,752,152
<INCOME-PRETAX> 21,448,608 5,095,308 5,244,658 5,405,164
<INCOME-PRE-EXTRAORDINARY> 21,448,608 5,095,308 5,244,658 5,405,164
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 12,629,880 3,009,229 3,092,317 3,133,551
<EPS-PRIMARY> 1.90 0.45 0.47 0.47
<EPS-DILUTED> 1.85 0.44 0.46 0.46
<YIELD-ACTUAL> 2.24 2.71 2.60 2.38
<LOANS-NON> 0 0 0 0
<LOANS-PAST> 0 0 0 0
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 100,000 100,000 100,000 100,000
<CHARGE-OFFS> 0 0 0 0
<RECOVERIES> 0 0 0 0
<ALLOWANCE-CLOSE> 100,000 100,000 100,000 100,000
<ALLOWANCE-DOMESTIC> 100,000 100,000 100,000 100,000
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1998 MAR-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 MAR-31-1998
<CASH> 35,195,951 69,872,153
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 35,000,000 50,000,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 489,749,346 462,081,710
<INVESTMENTS-CARRYING> 955,143,294 890,541,133
<INVESTMENTS-MARKET> 963,295,155 897,903,949
<LOANS> 69,889,107 78,329,537
<ALLOWANCE> 100,000 100,000
<TOTAL-ASSETS> 1,643,676,060 1,601,165,068
<DEPOSITS> 962,033,587 800,652,692
<SHORT-TERM> 561,845,785 682,405,433
<LIABILITIES-OTHER> 13,849,693 15,070,713
<LONG-TERM> 0 0
24,175,256 24,168,180
0 0
<COMMON> 67,059 66,791
<OTHER-SE> 81,704,680 78,801,299
<TOTAL-LIABILITIES-AND-EQUITY> 1,643,676,060 1,601,165,068
<INTEREST-LOAN> 846,834 668,706
<INTEREST-INVEST> 20,122,863 20,311,580
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 20,969,697 20,980,286
<INTEREST-DEPOSIT> 6,773,104 5,651,354
<INTEREST-EXPENSE> 15,177,451 13,856,161
<INTEREST-INCOME-NET> 5,792,246 7,124,125
<LOAN-LOSSES> 0 0
<SECURITIES-GAINS> 270,639 200,427
<EXPENSE-OTHER> 23,564,795 23,677,108
<INCOME-PRETAX> 6,249,409 5,659,609
<INCOME-PRE-EXTRAORDINARY> 6,249,409 5,659,609
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,535,626 3,211,661
<EPS-PRIMARY> 0.53 0.48
<EPS-DILUTED> 0.51 0.47
<YIELD-ACTUAL> 1.84 2.08
<LOANS-NON> 0 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 100,000 100,000
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 100,000 100,000
<ALLOWANCE-DOMESTIC> 100,000 100,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 APR-01-1996 JUL-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 19,094,515 29,141,332 26,744,762 7,936,220
<INT-BEARING-DEPOSITS> 0 0 0 0
<FED-FUNDS-SOLD> 120,000,000 50,000,000 75,000,000 94,000,000
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 271,120,964 121,177,563 181,094,653 232,492,592
<INVESTMENTS-CARRYING> 460,009,923 296,016,758 365,511,655 379,448,852
<INVESTMENTS-MARKET> 460,182,579 294,333,031 361,753,769 376,956,153
<LOANS> 66,336,889 36,721,856 86,123,750 43,801,483
<ALLOWANCE> 100,000 56,047 84,114 84,114
<TOTAL-ASSETS> 965,393,760 553,828,149 760,147,129 784,799,938
<DEPOSITS> 596,516,909 388,241,300 474,368,094 488,661,498
<SHORT-TERM> 296,421,201 99,798,353 217,001,552 224,626,676
<LIABILITIES-OTHER> 10,788,747 10,467,527 11,620,911 11,737,189
<LONG-TERM> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 65,876 66,380 66,383 66,383
<OTHER-SE> 61,601,026 55,154,590 57,090,188 59,708,191
<TOTAL-LIABILITIES-AND-EQUITY> 965,393,760 553,828,149 760,147,129 784,799,938
<INTEREST-LOAN> 2,332,158 418,031 579,897 591,833
<INTEREST-INVEST> 34,355,269 5,546,682 7,386,431 9,768,547
<INTEREST-OTHER> 0 0 0 0
<INTEREST-TOTAL> 36,677,427 5,964,713 7,966,328 10,360,380
<INTEREST-DEPOSIT> 9,271,675 977,919 2,092,538 2,495,044
<INTEREST-EXPENSE> 18,668,033 2,022,877 3,904,330 5,662,451
<INTEREST-INCOME-NET> 18,009,394 3,941,836 4,061,998 4,697,929
<LOAN-LOSSES> 65,000 21,047 28,067 0
<SECURITIES-GAINS> (2,488) 2,488 3,825 (14,694)
<EXPENSE-OTHER> 64,613,424 14,893,377 15,582,685 15,863,550
<INCOME-PRETAX> 12,517,665 2,397,741 3,186,350 3,466,858
<INCOME-PRE-EXTRAORDINARY> 7,666,161 1,465,430 1,965,653 2,172,949
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 7,666,161 1,465,430 1,965,653 2,172,949
<EPS-PRIMARY> 1.15 0.23 0.31 0.34
<EPS-DILUTED> 1.14 0.23 0.30 0.34
<YIELD-ACTUAL> 3.13 4.36 3.62 3.34
<LOANS-NON> 0 0 0 0
<LOANS-PAST> 0 0 0 0
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 35,000 35,000 56,047 84,114
<CHARGE-OFFS> 65,000 21,047 28,067 0
<RECOVERIES> 0 0 0 0
<ALLOWANCE-CLOSE> 100,000 56,047 84,114 84,114
<ALLOWANCE-DOMESTIC> 0 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
