<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 September 30, 1999
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)
<TABLE>
<S> <C>
DELAWARE 04-3279817
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
200 CLARENDON STREET, P.O. BOX 9130,
BOSTON, MA 02117-9130
(Address of principal executive
offices, including Zip Code)
(617) 330-6700
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO
As of October 29, 1999 there were 14,569,795 shares of Common Stock
outstanding.
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION
PAGE
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998 (audited) 4
Condensed Consolidated Statements of Income and Comprehensive
Income (unaudited)
Nine months ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Income and Comprehensive
Income (unaudited)
Three months ended September 30, 1999 and 1998 6
Condensed Consolidated Statement of Stockholder's Equity (unaudited)
Nine months ended September 30, 1999 7
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1999 and 1998 8
Notes to Condensed Consolidated Financial Statements 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 18
AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES 37
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
ASSETS (unaudited)
<S> <C> <C>
Cash and due from banks $ 46,530,053 $ 18,775,240
Securities held to maturity (approximate fair value of
$1,525,146,189 and $948,645,106 at September 30, 1999
and December 31, 1998, respectively) 1,546,182,995 942,816,546
Securities available for sale 358,606,504 345,069,507
Non-marketable equity securities 15,000,000 7,626,500
Loans, less allowance for loan losses of $100,000
at September 30, 1999 and December 31, 1998 127,905,553 54,291,985
Accrued interest and fees receivable 44,352,900 28,666,818
Equipment and leasehold improvements, net 11,033,342 10,832,688
Goodwill, net 35,530,262 43,767,163
Other assets 15,114,630 13,661,094
----------------------- ---------------------
TOTAL ASSETS $ 2,200,256,239 $ 1,465,507,541
======================= =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 218,523,487 $ 173,207,097
Savings 900,454,888 667,097,468
Time 86,105,150 65,000,000
-------------------- ------------------
Total deposits 1,205,083,525 905,304,565
Securities sold under repurchase agreements 696,443,451 434,168,072
Short-term borrowings 121,000,000 -
Other liabilities 24,516,459 13,562,592
-------------------- ------------------
Total liabilities 2,047,043,435 1,353,035,229
-------------------- ------------------
Commitments and contingencies (Note 9)
Company-obligated, mandatorily redeemable, preferred
securities of subsidiary trust holding solely junior
subordinated deferrable interest debentures of the Company 24,210,638 24,189,409
-------------------- ------------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 (shares authorized: 1,000,000;
issued and outstanding: 0 at 9/30/99 and 12/31/98) - -
Common stock, par value $0.01 (shares authorized: 20,000,000;
issued and outstanding: 14,560,825 at 9/30/99 and
6,722,050 at 12/31/98) 145,717 67,261
Surplus 85,187,070 57,705,468
Deferred compensation (816,085) (1,198,604)
Retained earnings 48,063,534 33,483,703
Accumulated other comprehensive loss, net (3,577,962) (1,774,885)
Treasury stock, par value $0.01 (10,814 at 9/30/99
and 4,000 at 12/31/98)
(108) (40)
-------------------- ------------------
Total stockholders' equity 129,002,166 88,282,903
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,200,256,239 $ 1,465,507,541
======================= =====================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 1,273,015 $ 1,133,387
Investment securities held to maturity and available for sale 69,870,993 61,455,824
Loans 2,460,112 2,216,769
------------------ -- ---------------
Total interest income 73,604,120 64,805,980
Interest expense:
Deposits 29,282,905 20,706,395
Short-term borrowings 19,479,173 24,659,533
------------------ ------------------
Total interest expense 48,762,078 45,365,928
------------------ ------------------
Net interest income 24,842,042 19,440,052
Non-interest income:
Asset administration fees 97,404,115 68,394,451
Computer service fees 367,239 395,208
Other operating income 517,926 610,026
Gain on sale of securities available for sale - 757,640
------------------ ------------------
Net operating revenue 123,131,322 89,597,377
OPERATING EXPENSES:
Compensation and benefits 60,371,600 44,542,486
Technology and telecommunications 11,139,754 7,311,567
Transaction processing services 6,783,990 5,366,370
Occupancy 6,061,534 5,130,111
Depreciation and amortization 2,834,738 1,905,939
Amortization of goodwill 1,330,002 -
Travel and sales promotion 1,733,117 1,429,233
Professional fees 2,554,142 1,060,574
Insurance 572,505 590,696
Other operating expenses 5,125,880 3,712,338
------------------- ----------------
Total operating expenses 98,507,262 71,049,314
------------------ -----------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 24,624,060 18,548,063
Provision for income taxes 7,879,700 6,677,303
Minority interest expense, net of income taxes 1,245,674 1,172,400
------------------ ------------------
NET INCOME 15,498,686 10,698,360
------------------ ------------------
Other comprehensive income, net of tax:
Unrealized gain/(loss) on securities:
Unrealized holding losses arising during the period (1,803,077) (3,724,298)
Less: reclassification adjustment for gains included in net income - 484,890
------------------ ------------------
Other comprehensive loss (1,803,077) (3,239,508)
------------------ ------------------
COMPREHENSIVE INCOME $ 13,695,609 $ 7,458,852
================== ===================
BASIC EARNINGS PER SHARE $ 1.09 $ 0.80
================== ==================
DILUTED EARNINGS PER SHARE $ 1.05 $ 0.78
================== ==================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 154,170 $ 414,646
Investment securities held to maturity and available for sale 27,265,395 21,740,123
Loans 954,009 701,230
------------------ ------------------
Total interest income 28,373,574 22,855,999
Interest expense:
Deposits 10,555,342 8,281,938
Short-term borrowings 8,757,372 8,050,379
------------------ ------------------
Total interest expense 19,312,714 16,332,317
------------------ ------------------
Net interest income 9,060,860 6,523,682
Non-interest income:
Asset administration fees 33,932,756 23,371,441
Computer service fees 121,521 122,430
Other operating income 249,442 142,329
Gain on sale of securities available for sale - 286,574
------------------ ------------------
Net operating revenue 43,364,579 30,446,456
OPERATING EXPENSES:
Compensation and benefits 21,518,626 15,195,843
Technology and telecommunications 3,714,089 2,508,067
Transaction processing services 2,490,883 1,604,561
Occupancy 2,022,118 1,712,332
Depreciation and amortization 984,351 636,128
Amortization of goodwill 443,024 -
Travel and sales promotion 648,699 426,442
Professional fees 863,505 299,170
Insurance 190,021 198,277
Other operating expenses 1,873,303 1,226,591
------------------ ------------------
Total operating expenses 34,748,619 23,807,411
------------------ ------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 8,615,960 6,639,045
Provision for income taxes 2,597,027 2,297,172
Minority interest expense, net of income taxes 427,438 390,800
------------------ ------------------
NET INCOME 5,591,495 3,951,073
------------------ ------------------
Other comprehensive income, net of tax:
Unrealized gain/(loss) on securities:
Unrealized holding losses arising during the period (1,940,398) (2,392,167)
Less: reclassification adjustment for gains included in net income - 183,407
------------------ ------------------
Other comprehensive loss (1,940,398) (2,208,760)
------------------ ------------------
COMPREHENSIVE INCOME $ 3,651,097 $ 1,742,313
================== ==================
BASIC EARNINGS PER SHARE $ 0.38 $ 0.30
================== ==================
DILUTED EARNINGS PER SHARE $ 0.37 $ 0.29
================== ==================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON DEFERRED RETAINED
STOCK SURPLUS COMPENSATION EARNINGS
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $ 67,261 $ 57,705,468 $ (1,198,604) $ 33,483,703
Amortization of deferred compensation - - 382,519 -
Exercise of stock options 1,476 1,490,534 - -
Treasury stock repurchased - 68 - -
Common stock issuance 9,000 25,991,000 - -
Net income - - - 15,498,686
Stock dividend, two-for-one split 67,980 - - (67,980)
Cash dividend - - - (850,875)
Change in accumulated
other comprehensive income/(loss), net - - - -
---------------- ---------------- ----------------- ----------------
BALANCE, SEPTEMBER 30, 1999 $ 145,717 $ 85,187,070 $ (816,085) $ 48,063,534
================ ================ ================= ================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
INCOME/(LOSS) STOCK TOTAL
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $ (1,774,885) (40) $ 88,282,903
Amortization of deferred compensation - - 382,519
Exercise of stock options - - 1,492,010
Treasury stock repurchased - (68) -
Common stock issuance - - 26,000,000
Net income - - 15,498,686
Stock dividend, two-for-one split - - -
Cash dividend - - (850,875)
Change in accumulated
other comprehensive income/(loss), net (1,803,077) - (1,803,077)
------------------ -------------- --------------
BALANCE, SEPTEMBER 30, 1999 $ (3,577,962) $ (108) $ 129,002,166
================== ============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,498,686 $ 10,698,360
---------------------- -----------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,164,740 1,905,939
Amortization of deferred compensation 382,519 422,665
Amortization of premiums on securities, net of accretion of discounts 4,719,027 6,389,485
Deferred income taxes (1,014,230) 720,353
Loss on sale of securities available for sale - (757,640)
Changes in assets and liabilities:
Accrued interest and fees receivable (8,686,084) (1,655,704)
Other assets 481,825 (4,509,702)
Other liabilities 10,953,868 (253,661)
---------------------- -----------------------
Total adjustments 11,001,665 2,261,735
---------------------- -----------------------
Net cash provided by operating activities 26,500,351 12,960,095
---------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 68,746,762 142,054,185
Proceeds from maturities of securities held to maturity 268,198,296 203,637,128
Proceeds from sales of securities available for sale - 113,729,883
Purchases of securities available for sale (87,188,680) (229,340,372)
Purchases of securities held to maturity (874,196,158) (370,455,046)
Purchase of non-marketable equity securities (7,373,500) (2,149,900)
Net (increase)/decrease in federal funds sold and securities
purchased under resale agreements - (35,000,000)
Net increase in loans (73,613,568) (25,209,058)
Purchases of equipment and leasehold improvements (3,014,165) (3,669,770)
---------------------- -----------------------
Net cash used for investing activities (708,441,013) (206,402,950)
---------------------- -----------------------
</TABLE>
8
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits $ 45,316,389 $ 15,089,269
Net increase in time and savings deposits 254,462,570 236,808,932
Net increase/(decrease) in short-term borrowings 383,275,379 (59,262,199)
Proceeds from exercise of stock options 1,492,010 893,652
Proceeds from issuance of common stock 26,000,000 -
Purchase of treasury stock - (77,000)
Cash dividend to S Corp shareholders - (250,000)
Cash dividends to IFSC shareholders (850,875) (589,714)
------------------------ ----------------------
Net cash provided by financing activities 709,695,474 192,612,940
------------------------ ----------------------
NET INCREASE IN CASH AND DUE FROM BANKS 27,754,812 (829,915)
------------------------ ----------------------
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 18,775,240 17,298,566
------------------------ ----------------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 46,530,052 $ 16,468,651
======================== ======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 47,659,000 $ 44,663,000
======================== ======================
Cash paid for income taxes $ 5,943,000 $ 5,333,000
======================== ======================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On May 29, 1998, the Company purchased all of the outstanding capital stock
of AMT Capital Services, Inc., in exchange for 388,012 shares of the
Company's common stock. During 1998, AMT Capital Services, Inc., distributed
a noncash dividend of $55,366. The acquisition was accounted for using the
pooling-of-interests method of accounting.
In September 1999, as part of the termination of the outsourcing agreement
with BankBoston, the Company expects to receive a termination fee of $7
million in early 2000. Accordingly, the Company has accrued the $7 million
termination fee and included the balance in `Accrued interest and fees
receivable' on the Company's consolidated balance sheet at September 30,
1999.
See notes to condensed consolidated financial statements.
9
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS AND THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 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. IFSC 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 Investors Capital Services, Inc, and the Bank and its domestic and
foreign subsidiaries.
On March 26, 1999, the Company completed the issuance and sale of 900,000
shares of Common Stock at $29 per share in a private placement to one
investor. The net capital raised in the private placement was used to
support the Company's balance sheet growth.
2. INTERIM FINANCIAL STATEMENTS
The condensed consolidated interim financial statements of the Company
and subsidiaries as of September 30, 1999 and 1998 and for the nine month
periods and three-month periods ended September 30, 1999 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.
All share numbers in this report have been restated, when applicable, to
reflect the two-for-one stock split paid March 17, 1999.
10
<PAGE>
3. 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 September 30, 1999 or December 31, 1998. In addition, there have
been no loan charge-offs or recoveries during the nine months ended
September 30, 1999 and 1998. Loans consisted of the following at September
30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Loans to individuals $ 54,219,485 $ 25,582,978
Loans to not-for-profit institutions 12,500 12,500
Loans to mutual funds 73,773,568 28,796,507
------------------- -----------------
128,005,553 54,391,985
Less allowance for loan losses 100,000 100,000
------------------- -----------------
Total $ 127,905,553 $ 54,291,985
=================== =================
</TABLE>
The Company had commitments to lend of approximately $150,995,000 and
$141,399,000 at September 30, 1999 and December 31, 1998, respectively.
The terms of these commitments are similar to the terms of outstanding
loans.
4. GOODWILL
Goodwill related to the BankBoston Domestic Institutional Trust and
Custody Business (the "Business") is summarized as follows (Dollars in
Thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Goodwill $ 43,860 $ 44,209
Less purchase price adjustment (7,000) -
Less accumulated amortization (1,330) (442)
------------------ ------------------
$ 35,530 $ 43,767
================== ==================
</TABLE>
In September 1999, the Company received notification from BankBoston of
their intent to terminate the outsourcing agreement connected to the
acquisition of the BankBoston Domestic Trust and Custody Business.
Pursuant to the terms of the outsourcing agreement, the Company will
receive a termination fee of $7 million on or prior to the effective date
of termination. Therefore, the Company has decreased the overall purchase
price of the BankBoston Domestic Trust and Custody Business acquisition by
$7 million.
5. DEPOSITS
Time deposits at September 30, 1999 and December 31, 1998 include
noninterest-bearing amounts at both dates of approximately $65,000,000.
All time deposits had a minimum balance of $100,000 and a maturity of less
than six months at September 30, 1999 and December 31, 1998.
11
<PAGE>
6. SHORT-TERM BORROWINGS
The components of short-term borrowings are as follows at September 30,
1999 and December 31, 1998.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Federal Home Loan Bank of Boston $ 120,000,000 $ -
Treasury, tax and loan account 1,000,000 -
------------------- -----------------
Total $ 121,000,000 $ -
=================== =================
</TABLE>
The Company has a borrowing arrangement with the Federal Home Loan Bank of
Boston, which is utilized on an overnight basis to satisfy temporary
funding requirements. The interest rate on the outstanding balance at
September 30, 1999 was 5.69%.
The Company receives federal tax deposits from clients as agent for the
Federal Reserve Bank and accumulates these deposits in the Treasury, tax
and loan account. The Federal Reserve Bank charges the Company interest at
the Federal funds rate on such deposits. The interest rate on the
outstanding balance at September 30, 1999 was 5.10%.
7. 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 $0.01 per
share.
On February 16, 1999, the Board of Directors approved a two-for-one stock
split in the form of a 100% stock dividend to shareholders of record on
March 1, 1999. The dividend was paid on March 17, 1999. A total of
6,797,973 shares of common stock were issued in connection with the split.
The par value of these additional shares was capitalized by a transfer
from retained earnings to common stock. The stock split did not cause any
change in the $0.01 par value per share of the common stock or in total
stockholders' equity. Prior period share and per share amounts have been
restated for the stock split, when applicable.
The Company has three stock option plans: the Amended and Restated 1995
Stock Plan, the Amended and Restated 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 2,320,000 shares of
Common Stock to certain employees, consultants, directors and officers.
The options may be awarded as incentive stock options (employees only),
non-qualified stock options, stock awards or opportunities to make direct
purchases of stock. Of the 2,320,000 shares of Common Stock authorized for
issuance under the plan, 725,738 were available for grant at September 30,
1999.
Under the terms of the Amended and Restated 1995 Non-Employee Director
Stock Option Plan, the Company may grant options to non-employee directors
to purchase up to a maximum of 200,000 shares of Common Stock. Options to
purchase 5,000 shares of Common Stock were awarded on November 8, 1995 to
each director. Any director elected or appointed after such date will
receive an automatic initial grant of options to purchase 2,500 shares
upon becoming a director. Thereafter, each director will receive an
automatic grant of options to purchase 2,500 shares effective upon each
one-year anniversary of the date of such director's original grant.
Additionally, non-employee 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
Amended and Restated 1995 Non-Employee Director Stock Option Plan. The
number of shares of stock underlying the option is equal to the quotient
obtained by dividing the cash retainer by the value of an option on the
date of grant as determined using the Black-Scholes model.
The exercise price of options under the Amended and Restated 1995
Non-Employee Director Stock Option Plan and the incentive stock options
under the Amended and Restated 1995 Stock Plan may not be less than the
fair market value at the date of the grant. The exercise price of the
non-qualified 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 by the Compensation Committee at
the date of the grant.
12
<PAGE>
7. STOCKHOLDERS' EQUITY (CONTINUED)
In November 1995, the Company granted 224,000 of shares of Common Stock to
certain officers of the Company under the 1995 Stock Plan. Of these
grants, 210,000 shares vest in sixty equal monthly installments, and the
remainder vests 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 Amended and Restated 1995 Stock Plan. On May 29, 1998,
the Company granted 20,000 shares of Common Stock to an officer of
Investors Capital Services, Inc. The Company has recorded deferred
compensation of $816,085 and $1,198,604 at September 30, 1999 and December
31, 1998 respectively, related to these grants.
Under the terms of the 1997 Employee Stock Purchase Plan, the Company may
issue up to 280,000 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. The 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 Amended and Restated 1995
Non-Employee Director Stock Option Plan 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, 1998 1,405,622 $ 21
Granted 106,855 30
Exercised (289,470) 31
Canceled (19,326) 20
--------------
Outstanding at September 30, 1999 1,203,681 $ 23
==============
Outstanding and exercisable at September 30, 1999 679,217
==============
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1997 1,034,568 $ 15
Granted 116,596 26
Exercised (51,210) 25
Canceled (45,212) 12
--------------
Outstanding at September 30, 1998 1,054,742 $ 19
==============
Outstanding and exercisable at September 30, 1998 516,910
==============
</TABLE>
A summary of activity under the 1997 Employee Stock Purchase Plan is as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------- --- ---------------
SHARES SHARES
--------------- ---------------
<S> <C> <C>
Total shares available under the Plan, beginning of period 216,802 257,504
Issued at June 30 (21,247) (20,732)
Issued at December 31 - (19,970)
=============== ===============
Total shares available under the Plan, end of period 195,555 216,802
=============== ===============
</TABLE>
For the six months ended June 30, 1999, the purchase price of the stock
was $27.50 or 90% of the average market value of the Common Stock on the
first business day of the payment period ending June 30, 1999.
13
<PAGE>
7. STOCKHOLDERS' EQUITY (CONTINUED)
For the first six months of 1998 the purchase price of the stock was
$21.625, or 90% of the average market value of the Common Stock on the
first business day of the payment period ending June 30, 1998, and for the
final six months of 1998 the purchase price of the stock was $23.875, or
90% of the average market value of the Common Stock on the last business
day of the payment period ending December 31, 1998.
EARNINGS PER SHARE - Under SFAS No. 128, the Company is required to
disclose a reconciliation of Basic EPS and Diluted EPS for the periods
ended September 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
PER
SHARE
INCOME SHARES AMOUNT
<S> <C> <C> <C>
SEPTEMBER 30, 1999
BASIC EPS
Income available to common stockholders $ 15,498,686 14,220,136 $ 1.09
===========
Dilutive effect of common equivalent shares of stock options
527,855
----------------
DILUTED EPS
Income available to common stockholders $ 15,498,686 14,747,991 $ 1.05
================ ================ ===========
SEPTEMBER 30, 1998
BASIC EPS
Income available to common stockholders $10,698,360 13,372,060 $ 0.80
===========
Dilutive effect of common equivalent shares of stock options 427,704
----------------
DILUTED EPS
Income available to common stockholders $10,698,360 13,799,764 $ 0.78
================ ================ ===========
</TABLE>
8. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
LINES OF CREDIT - At September 30, 1999, the Company had commitments to
individuals and mutual funds under collateralized open lines of credit
totaling $209,713,000, against which $58,718,000 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 - The contractual or notional amounts of swap
agreements, which are derivative financial instruments, held by the
Company at September 30, 1999 and 1998 were $500,000,000 and $430,000,000,
respectively. Interest rate contracts involve an agreement with a
counterparty to exchange cash flows based on an underlying interest rate
index. A swap agreement involves the exchange of a series of interest
payments, either at a fixed or variable rate, based upon the notional
amount without the exchange of the underlying principal amount. The
Company's exposure from these interest rate contracts results from the
possibility that one party may default on its contractual obligation. The
Company has never experienced terminations by counterparties of interest
rate swaps. Credit risk is limited to the positive fair value of the
derivative financial instrument, which is significantly less than the
notional value. During the first nine months of 1999, the Company entered
into agreements to assume fixed-rate interest payments in exchange for
variable market-indexed interest payments. The original terms range from
12 to 36 months. The weighted-average fixed-payment rate was 5.54% at
September 30, 1999. Variable-interest payments received are indexed to the
one month London Interbank Offering Rate and the overnight Fed Funds rate.
At September 30, 1999, the weighted-average rate of variable
market-indexed interest payment obligations to the Company was 5.38% and
5.22% respectively, for the London Interbank Offering Rate and Fed Fund
indexed payments. The effect of these agreements was to lengthen
short-term variable rate liabilities into longer-term fixed rate
liabilities. These contracts had no carrying value and the fair value was
approximately $2,016,256 at September 30, 1999.
14
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
RESTRICTIONS ON CASH BALANCES - The Company is required to maintain
certain average cash reserve balances. The reserve balance requirement
with the Federal Reserve Bank as of September 30, 1999 was $8,500,000. In
addition, other cash balances in the amounts of $20,008 and $1,622,839
were pledged to secure clearings with depository institutions, National
Securities Clearing Corporation and Depository Trust Company,
respectively, as of September 30, 1999.
LEASE COMMITMENTS - Minimum future commitments on non-cancelable operating
leases at September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
Bank Premises Equipment
<S> <C> <C>
1999 $ 1,752,029 $ 576,206
2000 6,685,369 1,473,962
2001 6,560,668 673,235
2002 6,091,107 121,737
2003 and beyond 28,444,443 3,014
</TABLE>
Total rent expense was $8,229,000 and $6,811,000 for the nine months
ended September 30, 1999 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 $482,000 and
$448,000 for the nine months ended September 30, 1999 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 September 30, 1999
that are material to the consolidated financial position or results of
operations of the Company.
10. 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 adverse effect on the Company's and the Bank's
results of operations and financial condition. 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 September 30, 1999, that the Company and the Bank meet all capital
adequacy requirements to which it is subject.
15
<PAGE>
10. REGULATORY MATTERS (CONTINUED)
As of September 30, 1999, 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 Company and the Bank for the quarter ended September 30,
1999 and the year ended December 31, 1998.
<TABLE>
Caption
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 SEPTEMBER 30, 1998:
Total Capital
(to Risk Weighted Assets
- the Company) $121,360,504 16.47% $58,932,539 8.00% N/A N/A
Total Capital
(to Risk Weighted Assets
-the Bank) $118,729,223 16.16% $58,789,358 8.00% $73,486,698 10.0%
Tier I Capital
(to Risk Weighted Assets
- the Company) $121,260,504 16.46% $29,466,269 4.00% N/A N/A
Tier I Capital
(to Risk Weighted Assets
-the Bank) $118,629,223 16.14% $29,394,679 4.00% $44,092,019 6.00%
Tier I Capital
(to Average Assets
- the Company) $121,260,504 5.93% $81,809,974 4.00% N/A N/A
Tier I Capital
(to Average Assets
-the Bank) $118,629,223 5.81% $81,746,718 4.00% $102,183,397 5.00%
AS OF DECEMBER 31, 1998:
Total Capital
(to Risk Weighted Assets
- the Company) $70,580,033 15.34% $36,798,822 8.00% N/A N/A
Total Capital
(to Risk Weighted Assets
- the Bank) $67,866,671 14.81% $36,652,540 8.00% $45,815,675 10.00%
Tier I Capital
(to Risk Weighted Assets
- the Company) $70,480,033 15.32% $18,399,411 4.00% N/A N/A
Tier I Capital
(to Risk Weighted Assets
- the Bank) $67,766,671 14.79% $18,326,270 4.00% $27,489,405 6.00%
Tier I Capital
(to Average Assets
- the Company) $71,480,033 4.61% $61,215,675 4.00% N/A N/A
Tier I Capital
(to Average Assets
- the Bank) $67,766,671 4.43% $61,186,835 4.00% $76,483,544 5.00%
</TABLE>
Under Massachusetts law, trust companies such as the Bank may only pay
dividends out of `net profits' and only to the extent that such payments
will not impair the Bank's capital stock and surplus account. If, prior to
declaration of a dividend, the Bank's capital stock and surplus accounts
do not equal at least 10% of its deposit liabilities, then prior to the
payment of the dividend, the Bank must transfer from net profits to its
surplus account the amount required to make its surplus account equal to
either (i) together with capital stock, 10% of deposit liabilities, or
(ii) subject to certain adjustments, 100% of capital stock.
16
<PAGE>
11. SEGMENT REPORTING
The Company does not utilize segment information for internal reporting as
management views the Company as one segment. The following represents net
operating revenue by geographic area for the nine months ended September
30, 1999 and 1998, and long-lived assets by geographic area as of
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
NET OPERATING NET OPERATING LONG-LIVED LONG-LIVED
GEOGRAPHIC REVENUE REVENUE ASSETS ASSETS
INFORMATION: 1999 1998 1999 1998
-------------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
United States $117,680,878 $ 83,881,792 $10,468,741 $ 9,703,620
Ireland 3,546,356 2,918,105 386,148 291,153
Canada 1,822,935 2,639,872 178,453 295,277
Cayman Islands 81,153 157,608 - -
================ ================ =============== ================
Total $123,131,322 $ 89,597,377 $11,033,342 $ 10,290,050
================ ================ =============== ================
</TABLE>
The following represents the Company's operating revenue by service
line for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
OPERATING REVENUE OPERATING REVENUE
SERVICE LINES: 1999 1998
--------------------- ------------------ --------------------
<S> <C> <C>
Custody, accounting, transfer agency,
and administration $ 87,616,553 $ 61,839,595
Investment advisory 1,192,982 547,654
Securities lending 5,155,838 2,682,425
Foreign exchange 3,805,981 3,719,985
================== ====================
Total $ 97,771,354 $ 68,789,659
================== ====================
</TABLE>
No one customer accounted for 10% of the Company's consolidated net
operating revenues for the nine months ended September 30, 1999 and 1998.
17
<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 63 mutual fund complexes, investment advisors, banks
and insurance companies. The Company provides financial asset administration
services for net assets that totaled approximately $262 billion as of September
30, 1999, including approximately $14 billion of foreign assets. The Company
also engages in private banking transactions, including secured lending and
deposit accounts.
On May 29, 1998, the Company acquired AMT Capital Services, Inc. and an
affiliated company (collectively, `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 acquisition
agreement, the Company acquired all of the outstanding capital stock of AMT
Capital Services in exchange for 388,012 shares of the Company's common stock.
The acquisition was accounted for using 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 re-named Investors Capital
Services, Inc. On April 12, 1999, 6,814 of the shares issued by the Company were
returned to the Company pursuant to the indemnification and escrow provisions of
the acquisition agreement.
On October 1, 1998, the Bank acquired the domestic institutional trust
and custody business (`the Business') of BankBoston, N.A. Under the terms of the
purchase agreement, the Bank paid approximately $48 million to BankBoston as of
the closing and will pay up to an additional $6 million depending upon business
performance. The Business provides master trust and custody services to
endowments, pension funds, municipalities, mutual funds and other financial
institutions, primarily in New England. The acquisition was accounted for using
the purchase method of accounting. In connection with the acquisition, the Bank
and BankBoston also entered into an outsourcing agreement. Pursuant to the
outsourcing agreement, the Bank acts as custodian for three BankBoston asset
management related businesses: domestic private banking, institutional asset
management and international private banking. Under the outsourcing agreement,
the Company provides transaction processing and asset safekeeping and servicing
to the clients of those businesses. In September 1999, the Bank received
notification from BankBoston of its intent to terminate the outsourcing
agreement. The termination, expected to be effective in early 2000, will have no
impact on the remaining business purchased from BankBoston. Pursuant to the
terms of the outsourcing agreement, the Bank expects to receive a termination
fee of $7 million on or prior to the effective date of the termination.
Therefore, an adjustment to decrease the purchase price was made for $7 million.
The Bank does not anticipate a material impact on net income due to the
termination. The Bank was informed by BankBoston that its decision to terminate
the outsourcing agreement was not related in any way to the Company's quality of
service but was made as part of the integration process undertaken in connection
with the recently completed BankBoston/Fleet merger.
On February 16, 1999, the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100% stock dividend payable March 17,
1999 to stockholders of record on March 1, 1999. All share numbers in this
Report have been restated to reflect the two-for-one stock split paid March 17,
1999, where applicable.
On March 26, 1999, the Company completed the issuance and sale of
900,000 shares of Common Stock at $29 per share in a private placement to one
investor. The net capital raised in the private placement was used to support
the Company's balance sheet growth.
On October 29, 1999, the Bank entered into an agreement with Sanwa Bank
California, pursuant to which the Bank agreed to purchase the right to provide
institutional custody and related services to accounts managed by the Trust
Company of the West. The accounts subject to the agreement totaled approximately
$3.6 billion in assets at October 26, 1999. The Bank expects to complete the
purchase by March 31, 2000, subject to customary closing conditions.
18
<PAGE>
REVENUE AND INCOME OVERVIEW
The Company derives its revenues from financial asset administration
services and private banking transactions. Although interest income and
non-interest 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 all 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 non-interest
income) and net income are the most meaningful measures of the Company's
financial results. Net operating revenue increased 37% to $123,131,000 in the
first nine months of 1999 from $89,597,000 in the first nine months of 1998.
Non-interest income consists primarily of fees for financial asset
administration and is principally derived from custody, multicurrency
accounting, transfer agency and administration services for financial asset
managers and the assets they control. The Company's clients pay fees based on
the volume of assets under custody, portfolio transactions, income collected and
whether other value-added services such as foreign exchange, securities lending
and performance measurement are needed. Asset-based fees are usually charged on
a sliding scale and are subject to minimum fees. 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 non-interest 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.
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,' which involve
risks and uncertainties. Forward looking statements in this 10-Q include certain
statements regarding the Company's Year 2000 Project, liquidity and the effect
of BankBoston's anticipated termination of the outsourcing agreement entered
into in connection with the Company's acquisition of BankBoston's institutional
trust and custody business in October 1998 (the "Outsourcing Agreement"). 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 are subject to substantial risks and
uncertainties. The Company's liquidity is dependent, in part, upon the continued
availability of current borrowing facilities, the loss of which may impair the
Company's access to liquid funds. 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 or changes in the relationship between certain index 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. If the Company is not able to
recognize expense reduction or reallocation of resources after the anticipated
termination of the Outsourcing Agreement and the Company does not receive the $7
million termination payment, the termination of the Outsourcing Agreement may
have an adverse impact on the Company's results of operations and financial
condition.
The Company has been experiencing a period of rapid growth, which
places a strain on all of its resources, including management. In addition, the
Company must successfully integrate future acquisitions, if any, into the
Company's business. Also, the Company must continue to attract and retain
skilled personnel in a tight labor market. If the Company fails to manage growth
effectively, integrate acquisitions successfully or attract and retain skilled
employees, it could reduce the quality of the Company's services, lead to loss
of key employees and clients, and have a material adverse effect on the
Company's operations.
19
<PAGE>
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 effect on the Company. In addition, the Year 2000
Issue discussed below may affect the Company's operations. The Company's
successful completion of its Year 2000 Project is subject to the risks set forth
under `Year 2000 Readiness Disclosure' below. 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 its
competitors and changes or anticipated changes in economic conditions. Because
the Company's operating expenses are relatively fixed, any unanticipated
shortfall in revenues in a specified period may have an adverse impact on the
Company's results of operations for that period. 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.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 Issue is the result of the once common programming
standard using two digits rather than four to define the applicable year.
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 miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company's business is heavily dependent on its internal computer
systems to process transactions and conduct services for clients. In addition,
the Company relies on automated data communications with vendors, clients and
other third parties, as well as certain third party hardware and software
providers such as Electronic Data Systems. The Company also relies on other
third party relationships in the conduct of its business. For example, third
party vendors handle the payroll function for the Company, and the Company also
relies on the services of the landlords of its facilities, telecommunication
companies, utilities and commercial airlines, among others.
Any failure of the Company's internal computer systems, third party
data communications, third party hardware and software providers, other third
party vendors, or industry bodies due to the Year 2000 Issue could have a
material adverse impact on the Company's ability to provide timely and accurate
services to its clients. Any remediation by clients, vendors, or other industry
bodies that is incompatible with the Company's systems also could have a
material adverse impact on the Company's services. As a result, any such failure
could have a material adverse impact on the Company's financial condition and
results of operations. In addition, because the Company is regulated by Federal
and state banking authorities, failure to be Year 2000 compliant could subject
the Company to formal supervisory or enforcement actions, which could have a
material adverse impact on the Company's business.
Commencing in 1997, the Company, with the assistance of an outside
consultant, assessed its Year 2000 compliance status and developed a
comprehensive program to address related issues. The Company developed a phased
approach which included: creating an inventory of potentially date sensitive
items; assigning a risk rating to each item; assessing the compliance status of
each item; taking corrective action to renovate, replace, modify or upgrade to
achieve compliance; validating compliance; and developing and validating
contingency plans for each critical function as required. Based on the
compliance assessment, the Company determined that it would be required to
modify or upgrade portions of its software so that its computer systems would
properly process dates beyond December 31, 1999.
RENOVATION AND TESTING
The Company has utilized both internal and external resources to
modify, upgrade or replace existing applications and to test applications for
Year 2000 compliance. As of September 30, 1999, all of the Company's existing
internal applications have been renovated, compliance tested and approved.
Compliance testing consisted of executing an acceptance test where simulations
of specific `time shift' scenarios were performed for each application in order
to test key dates and conditions. All test data was then subject to detailed
review and certification by independent third-party reviewers prior to approval.
20
<PAGE>
In addition the Company successfully completed integration testing and
validation by June 30,1999. During the integration test phase the Company tested
interfaces with clients, business partners and industry agencies, as well as the
Company's internal applications. In early 1999, the Company offered its fund
accounting and custody clients the opportunity to participate in comprehensive
Year 2000 testing. A detailed test packet of information was distributed to
these clients, their advisors and other interested parties. The information
packet described the process for testing with the Company and included test
scripts, test portfolios and a sign-up sheet for testing. A number of clients
participated in testing during the second quarter of 1999, for which all testing
efforts were completed successfully.
During the first half of 1999, the Company participated in industry-wide
Year 2000 testing, or "street testing". The Company completed successful testing
with the Securities Industry Association, the Depository Trust Company, the
Federal Reserve Bank and the Bank of New York. The Company also completed
integration tests with data providers who deliver important information to the
Company, such as security prices and corporate action notifications.
The Company is continuing its Year 2000 efforts with regard to its network
of global subcustodians. The Company is a member of the Custody2000 Group, an
industry association leading the development of standardized Year 2000 testing
among major global industry participants. Members of the Custody2000 Group are
assigned testing with certain global service providers and share the results
with all members of the group. The Company completed all assigned testing
successfully in the third quarter of 1999. The Company also participates in the
Association of Global Custodians Year 2000 sub-committee which was formed to
analyze the Year 2000 status of global depositories, clearing agencies, stock
exchanges and payment systems.
During the fourth quarter of 1999, the Company will conduct
recertification testing, the final stage of the Year 2000 test effort.
Recertification testing involves re-executing compliance testing for core
applications prior to the end of 1999 as well as testing of any new development
efforts not part of the original Year 2000 test effort. The Company will
implement a freeze on new system implementation beginning in the fourth quarter.
CONTINGENCY PLANNING AND EVENT MANAGEMENT
During the second quarter of 1999, the Company completed the
development and validation of its Year 2000 Business Resumption Contingency
Plan. This plan addresses contingencies for all key services and products of the
Company and is derived from separate Year 2000 contingency plans for each
business unit. The contingency plans were developed to mitigate the risks
associated with the failure of systems at critical dates before and after the
Year 2000. All plans were reviewed and validated by an independent team composed
of members from Senior Management and Internal Audit.
In the third quarter of 1999, key business units successfully
participated in simulation exercises to test and ensure the effectiveness of
their Year 2000 contingency plans and to train staff. Simulation results were
reviewed and validated by an independent team comprised of members from Senior
Management and Internal Audit.
The Company is also undertaking extensive event management efforts.
Event management integrates all Year 2000 transition activities, including
contingency plan activation, and includes three components:
- Preparation activities performed prior to the century date change;
- Rollover weekend activities taking place during the weekend of
January 1, 2000; and
- Post-Year 2000 validation activities.
As part of event management, each business unit has identified its
plans to mitigate Year 2000 risks and its preparations involving data retention,
training, and testing functionality, among other details. The Company created an
event management communication center to coordinate, control and exchange
information relating to Year 2000 efforts and status. Finally, the Company will
conduct staff training sessions in the fourth quarter of 1999 to prepare for the
Year 2000 rollover.
Updates on the status of the Company's Year 2000 efforts are provided
regularly to senior management and the Board of Directors. The Company's Year
2000 program is also subject to review by the Company's Internal Audit
department and by Federal bank regulatory agencies.
21
<PAGE>
COSTS
The remaining 1999 cost of the Year 2000 project is estimated to be
approximately $479,000, which will be expensed as incurred. These 1999 costs may
include, but are not limited to, recertification testing, event management
planning, and testing of newly implemented systems. These amounts are not
expected to have a material effect on the Company's results of operations. As of
September 30, 1999, cumulative program expenditures were $3,511,000, of which
$1,746,000 were incurred in the first nine months of 1999. All amounts expensed
and to be expensed in connection with the Year 2000 issue will be funded through
operating cash flows.
The costs of the project and the dates on which the Company plans to
perform and complete Year 2000 recertification testing and event management
planning activities 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, availability of
and cooperation by clients, vendors and other third parties, the compatibility
of third-party interfaces, and similar uncertainties.
STATEMENT OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
Non-interest Income
Non-interest income increased $28,132,000 to $98,289,000 for the nine
months ended September 30, 1999 from $70,157,000 for the nine months ended
September 30, 1998. Non-interest income consists of the following items:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------------------------------------
1999 1998 Change
---------------- -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $ 97,404 $ 68,394 42 %
Computer service fees 367 395 (7)%
Other operating income 518 610 (15)%
Gain on sale of securities - 758 (100)%
================ ==============
Total Non-interest Income $ 98,289 $ 70,157 40 %
================ ==============
</TABLE>
Asset administration fees increased $29,010,000 to $97,404,000 for the
nine months ended September 30, 1999 compared to $68,394,000 for the nine
months ended September 30, 1998. The largest component of asset
administration fees is asset-based fees, which increased between periods due
to an increase in assets processed. Assets processed is the total dollar
value of financial assets on the reported date for which the Company provides
one or more of the following services: custody, multi-currency accounting,
institutional transfer agency, performance measurement, foreign exchange,
securities lending, mutual fund administration and investment advisory
services. Total net assets processed increased to $262 billion at September
30, 1999 from $151 billion at September 30, 1998. Of the $111 billion net
increase, approximately $68 billion relates to the Company's acquisition of
BankBoston's domestic institutional trust and custody business and the
related outsourcing agreement, on October 1, 1998. Of the remaining net
increase, approximately 40% reflects assets processed for new clients and the
remainder reflects growth of assets processed for existing clients. Another
significant portion of the increase in asset administration fees resulted
from the Company's success in marketing ancillary services such as cash
management and securities lending services.
Other operating income consists of dividends received relating to the
Federal Home Loan Bank of Boston stock investment and miscellaneous
transaction-oriented private banking fees. The decrease in other operating
income resulted from services previously provided by Investors Capital Advisors,
Inc., a wholly owned subsidiary of the Company, which could no longer be
provided after the acquisition due to regulatory restrictions imposed on the
Company. Investors Capital Advisors, Inc. was merged with and into Investors
Capital Services, Inc. on December 31, 1998.
22
<PAGE>
Operating Expenses
Total operating expenses increased by $27,458,000 to $98,507,000 for
the nine months ended September 30, 1999 compared to $71,049,000 for the nine
months ended September 30, 1998. The components of operating expenses were as
follows:
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
------------------ --------------- --------------
1999 1998 Change
------------------ --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $ 60,372 $ 44,542 36%
Technology and telecommunications 11,140 7,312 52
Transaction processing services 6,784 5,366 26
Occupancy 6,061 5,130 18
Depreciation and amortization 2,835 1,906 49
Amortization of goodwill 1,330 - 100
Travel and sales promotion 1,733 1,429 21
Professional fees 2,554 1,061 141
Insurance 572 591 (3)
Other operating expenses 5,126 3,712 38
------------ --------
Total Operating Expenses $ 98,507 $71,049 39%
============ ========
</TABLE>
Compensation and benefits expense increased by $15,830,000 or 36%
from period to period due to several factors. The average number of employees
increased 26% to 1,391 during the nine months ended September 30, 1999 from
1,102 during the same period in 1998. This increase in number of employees
relates to the increase in client relationships, the expansion of existing
client relationships during the period and the addition of employees related
to the BankBoston acquisition in October 1998. In addition, compensation
expense related to the Company's management incentive plans increased
$2,751,000 between periods because of the increase in earnings subject to
incentive payments. Benefits, including payroll taxes, group insurance plans,
retirement plan contributions and tuition reimbursement, increased by
$1,812,000 for the nine months ended September 30, 1999 from the same period
in 1998. The increase was due principally to increased payroll taxes
attributable to the increase in compensation expense.
Technology and telecommunications expense consists of operating lease
payments for microcomputers, fees charged by Electronic Data Systems for
mainframe data processing, telephone expense, software maintenance fees and
licenses, optical imaging and contracting programming fees. Technology and
telecommunications expense increased $3,828,000 from period to period. Expenses
related to the conversion of the BankBoston business, and on-going support
accounted for $1,693,000 of the increase. Also, contributing to the increase was
the Company's use of contract programmers to perform information systems
development projects, which accounted for $692,000 of the increase. Fees charged
by EDS increased $518,000 due to increased volume of mainframe data processing.
Increased hardware and software expenses needed to support the growth in assets
processed comprised the remainder of the increase.
Transaction processing services expense consists of volume related
expenses including subcustodian fees and external contract services. The
increase of $1,418,000 to $6,784,000 for the nine months ended September 30,
1999 relates primarily to an increase in subcustodian fees driven by the growth
in assets processed for new clients and the BankBoston business.
Occupancy expense increased $931,000 to $6,061,000 for the nine months
ended September 30, 1999 from $5,130,000 for the nine months ended September 30,
1998. The increase resulted from the temporary rental of office space relating
to the BankBoston acquisition, along with expansion of office space in the
Company's Boston location.
Depreciation and amortization expense increased $929,000 to $2,835,000
for the nine months ended September 30, 1999 from $1,906,000 for the nine months
ended September 30, 1998. Of the increase, $624,000 related to software costs
capitalized under SOP 98-1 throughout 1998 and the beginning of 1999 which were
placed in service in 1999. Also contributing to the increase was depreciation
relating to fixed assets acquired from BankBoston.
23
<PAGE>
The acquisition of BankBoston's institutional trust and custody
business was accounted for using the purchase method of accounting and, as a
result, the purchase price was allocated first to all identifiable tangible and
intangible assets acquired and liabilities assumed. The remainder of the
purchase price was then allocated to goodwill. Goodwill expense relates to the
amortization of the resulting goodwill from the acquisition, which is being
amortized over its estimated useful life. In September 1999, the Bank received
notification from BankBoston of its intent to terminate the outsourcing
agreement. The termination, expected to be effective in early 2000, will have no
impact on the remaining business purchased from BankBoston. Pursuant to the
terms of the outsourcing agreement, the Bank expects to receive a termination
fee of $7 million on or prior to the effective date of the termination.
Therefore, an adjustment to decrease the purchase price was made for $7 million.
The Bank does not anticipate a material impact on net income due to the
termination. The Bank was informed by BankBoston that its decision to terminate
the outsourcing agreement was not related in any way to the Company's quality of
service but was made as part of the integration process undertaken in connection
with the recently completed BankBoston/Fleet merger.
Travel and sales promotion expense consists of expenses incurred by the
sales force, client management staff and other employees in connection with
making sales calls on potential clients, traveling to existing client sites, and
the Company's foreign subsidiaries, and attending industry conferences. Travel
and sales promotion expense increased $304,000 to $1,733,000 for the nine months
ended September 30, 1999 from $1,429,000 for the nine months ended September 30,
1998, due primarily to increased travel relating to the integration of the
BankBoston business.
Professional fees increased $1,493,000 to $2,554,000 for the nine
months ended September 30, 1999 from $1,061,000 for the nine months ended
September 30, 1998. The increase in professional fees was mainly attributable to
consulting services related to the integration of the BankBoston business and to
tax planning.
Other operating expenses include fees for office supplies, recruiting
costs, temporary help and various fees assessed by the Massachusetts
Commissioner of Banks. These expenses increased $1,414,000 to $5,126,000 for the
nine months ended September 30, 1999 from $3,712,000 for the nine months ended
September 30, 1998. Recruiting costs accounted for $886,000 of the increase,
resulting from the growth in the Company's staffing needs. The growth in assets
processed has resulted in an overall increase in operating expenses.
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 nine months ended September 30, 1999 compared to the same
period in 1998.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
------------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Fed funds sold and
interest-earning deposits $ 269 $ (129) $ 140
Investment securities 10,727 (2,312) 8,415
Loans 468 (225) 243
------------ ------------- ----------
Total interest-earning assets $ 11,464 $ (2,666) $ 8,798
------------ ------------- -----------
INTEREST-BEARING LIABILITIES
Deposits $ 11,749 $ (3,173) $ 8,576
Borrowings (1,172) (4,008) (5,180)
------------ ------------- ------------
Total interest-bearing liabilities $10,577 $ 7,181 $ 3,396
------------ ------------- ------------
Change in net interest income $ 887 $ 4,515 $ 5,402
============ ============= ============
</TABLE>
Net interest income increased $5,402,000 or 28% to $24,842,000 for
the nine months ended September 30, 1999 from $19,440,000 for the same period
in 1998. This net increase resulted from an increase in interest income of
$8,798,000 offset by an increase in interest expense of $3,396,000. The net
impact of the above changes was a 13 basis point increase in net interest
margin.
24
<PAGE>
The increase in net interest income resulted from an expansion of
the balance sheet. The equity obtained in the $26 million private placement
completed in March 1999 allowed the Company to expand the average balance
sheet with deposits that had been in third-party sweeps. The Company's
average interest earning assets increased 19% compared to the same period in
1998.
Interest expense increased due to a 27% increase in average
interest-bearing liabilities. The increase in average interest-bearing
liabilities was offset by a decrease in the average interest rate paid by the
Company from 5.01% to 4.26% during the period.
Income Taxes
Taxes for the nine months ended September 30, 1999 were $7.9
million, up from $6.7 million a year ago. The effective tax rate for the
period was 32%, which compares to 36% for the same period in the prior year.
The period-over-period decrease resulted from the restructuring of corporate
entities for state tax planning purposes.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 1999 AND
1998
Non-interest Income
Non-interest income increased $10,382,000 to $34,304,000 for the
quarter ended September 30, 1999 from $23,922,000 for the quarter ended
September 30, 1998. Non-interest income consists of the following items:
<TABLE>
<CAPTION>
For the Quarter Ended
September 30,
-------------------------------------------------------
1999 1998 Change
---------------- -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $ 33,933 $ 23,371 45 %
Computer service fees 122 122 0 %
Other operating income 249 142 75 %
Gain on sale of securities - 287 (100)%
================ ==============
Total Noninterest Income $ 34,304 $ 23,922 43 %
================ ==============
</TABLE>
Asset administration fees increased $10,562,000 to $33,933,000 for the
quarter ended September 30, 1999 compared to $23,371,000 for the quarter
ended September 30, 1998. The largest component of asset administration fees
is asset-based fees, which increased between periods due to an increase in
assets processed. Total net assets processed increased to $262 billion at
September 30, 1999 from $151 billion at September 30, 1998. Of the $111
billion net increase, approximately $68 billion relates to the Company's
acquisition of BankBoston's domestic institutional trust and custody business
and the related outsourcing agreement, on October 1, 1998. Of the remaining
net increase, approximately 40% reflects assets processed for new clients and
the remainder reflects growth of assets processed for existing clients.
Another significant portion of the increase in asset administration fees
resulted from the Company's success in marketing ancillary services such as
cash management services and securities lending.
Other operating income consists of dividends received relating to the
Federal Home Loan Bank of Boston stock investment and miscellaneous
transaction-oriented private banking fees. The increase in other operating
income resulted primarily from an increase in Federal Home Loan Bank dividend
income.
25
<PAGE>
Operating Expenses
Total operating expenses increased by $10,941,000 to $34,749,000 for
the quarter ended September 30, 1999 compared to $23,807,000 for the quarter
ended September 30, 1998. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended September 30
------------------ --------------- --------------
1999 1998 Change
------------------ --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $ 21,519 $ 15,196 42%
Technology and telecommunications 3,714 2,508 48
Transaction processing services 2,491 1,605 55
Occupancy 2,022 1,712 18
Depreciation and amortization 984 636 55
Amortization of goodwill 443 - 100
Travel and sales promotion 649 426 52
Professional fees 864 299 189
Insurance 190 198 (4)
Other operating expenses 1,873 1,227 53
------------------ ---------------
Total Operating Expenses $ 34,749 $ 23,807 46%
================== ===============
</TABLE>
Compensation and benefits expense increased by $6,323,000 or 42%
from period to period due to several factors. The average number of employees
increased 29% to 1,490 during the quarter ended September 30, 1999 from 1,159
during the same period in 1998. This increase in number of employees relates
to the increase in client relationships, the expansion of existing client
relationships during the period and the addition of employees related to the
BankBoston acquisition in October 1998. In addition, compensation expense
related to the Company's management incentive plans increased $1,291,000
between periods because of the increase in earnings subject to incentive
payments. Benefits, including payroll taxes, group insurance plans,
retirement plan contributions and tuition reimbursement, increased by
$620,000 for the quarter ended September 30, 1999 from the same period in
1998.
Technology and telecommunications expense increased $1,206,000 from
period to period. Expenses related to increased transaction and processing
volume and on-going support accounted for $524,000 of the increase. Fees
charged by EDS increased $251,000 due to increased volume of mainframe data
processing. Also contributing to the increase was the Company's use of
contract programmers to perform information systems development projects,
which accounted for $173,000 of the increase.
Transaction processing services expense increased $886,000 to
$2,491,000 for the quarter ended September 30, 1999 primarily due to an
increase in subcustodian fees driven by the growth in assets processed.
Occupancy expense increased $310,000 to $2,022,000 for the quarter
ended September 30, 1999 from $1,712,000 for the quarter ended September 30,
1998. The increase resulted from the expansion of office space in the
Company's Boston location.
Depreciation and amortization expense increased $348,000 to $984,000
for the quarter ended September 30, 1999 from $636,000 for the quarter ended
September 30, 1998. Of the increase, $258,000 related to software costs
capitalized under SOP 98-1 throughout 1998 and the beginning of 1999 which
were placed in service in 1999. The remainder of the increase related to
fixed assets acquired due to increased headcount and office space.
26
<PAGE>
The acquisition of BankBoston's institutional trust and
custody business was accounted for using the purchase method of accounting
and as a result, the purchase price was allocated first to all identifiable
tangible and intangible assets acquired and liabilities assumed. The
remainder of the purchase price was then allocated to goodwill. Goodwill
expense relates to the amortization of the resulting goodwill from the
acquisition, which is being amortized over its estimated useful life. In
September 1999, the Bank received notification from BankBoston of its intent
to terminate the outsourcing agreement. The termination, expected to be
effective in early 2000, will have no impact on the remaining business
purchased from BankBoston. Pursuant to the terms of the outsourcing
agreement, the Bank expects to receive a termination fee of $7 million on or
prior to the effective date of the termination. Therefore, an adjustment to
decrease the purchase price was made for $7 million. The Bank does not
anticipate a material impact on net income due to the termination. The Bank
was informed by BankBoston that its decision to terminate the outsourcing
agreement was not related in any way to the Company's quality of service but
was made as part of the integration process undertaken in connection with the
recently completed BankBoston/Fleet merger.
Travel and sales promotion expense increased $223,000 to $649,000
for the quarter ended September 30, 1999 from $426,000 for the same period on
1998, due primarily to increased travel by the sales and client management
staff.
Professional fees increased $565,000 to $864,000 for the quarter
ended September 30, 1999 from $299,000 for the quarter ended September 30,
1998. The increase in professional fees was mainly attributable to consulting
services related to the integration of the BankBoston business and to tax
planning.
Other operating expenses increased $646,000 to $1,873,000 for the
quarter ended September 30, 1999 from $1,227,000 for the quarter ended
September 30, 1998. Recruiting costs accounted for $421,000 of the increase,
resulting from the growth in the Company's staffing needs. The growth in
assets processed has resulted in an overall increase in operating expenses.
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 September 30, 1999 compared to the
same period in 1998.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
------------ ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Fed funds sold and
interest-earning deposits $ (214) $ (47) $ (261)
Investment securities 5,974 (449) 5,525
Loans 336 (83) 253
------------ ------------ --------------
Total interest-earning assets $ 6,096 $ (579) $ 5,517
------------ ------------ --------------
INTEREST-BEARING LIABILITIES
Deposits $ 5,349 $ (3,075) $ 2,274
Borrowings 1,445 (738) 707
------------ ------------ --------------
Total interest-bearing liabilities $ 6,794 $ (3,813) $ 2,981
------------ ------------ --------------
Change in net interest income $ (698) $ 3,234 $ 2,536
============ ============ ==============
</TABLE>
Net interest income increased $2,536,000 or 39% to $9,060,000 for
the quarter ended September 30, 1999 from $6,524,000 for the same period in
1998. This net increase resulted from an increase in interest income of
$5,517,000, offset by an increase in interest expense of $2,981,000. The net
impact of the above change was a 15 basis point increase in net interest
margin.
The increase in interest income resulted from an expansion of the
balance sheet. The equity obtained in the $26 million private placement
completed in March 1999 allowed the Company to expand the average balance
sheet with deposits that had been in third-party sweeps. The Company's
average interest-earning assets increased 28% compared to the same period in
1998.
27
<PAGE>
Interest expense increased due primarily to a 32% increase in
interest-bearing liabilities. Offsetting the increase in interest-bearing
liabilities was a decrease in the average interest rate paid by the Company
from 4.98% to 4.45% during the period.
Income Taxes
Taxes for the quarter ended September 30, 1999 were $2.6 million, up
from $2.3 million a year ago. The effective tax rate for the period was 30%,
which compares to 35% for the same period in the prior year. The
period-over-period decrease resulted from the restructuring of corporate
entities for state tax planning purposes.
FINANCIAL CONDITION
INVESTMENT PORTFOLIO
The following table summarizes the Company's investment portfolio for the
dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
SECURITIES HELD TO MATURITY:
State and political subdivisions $ 63,656 $ 35,821
Mortgage-backed securities 1,270,463 733,109
Federal agency securities 204,408 166,181
Foreign government securities 7,656 7,706
----------------- --------------------
Total securities held to maturity $ 1,546,183 $ 942,817
================= ====================
SECURITIES AVAILABLE FOR SALE:
State and political subdivisions $ 36,601 $ 37,577
Corporate debt 46,600 48,070
Federal agency securities 52,877 -
Mortgage-backed securities 222,529 259,422
----------------- --------------------
Total securities available for sale $ 358,607 $ 345,069
================= ====================
</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 securities of state and political subdivisions,
mortgage-backed securities issued by the Federal National Mortgage
Association (`FNMA' or `Fannie Mae') and the Federal Home Loan Mortgage
Corporation (`FHLMC' or `Freddie Mac'), and Federal Agency callable bonds
issued by FHLMC and the Federal Home Loan Bank of Boston (`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, Federal Agency
callable bonds and corporate debt to increase the total return of the
investment portfolio. Mortgage-backed securities generally have a higher
yield than U.S. Treasury securities due to credit and prepayment risk. Credit
risk results from the possibility that a loss may occur if a counterparty is
unable to meet the terms of the 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 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.
28
<PAGE>
The amortized cost and weighted average yield of the Company's
securities held to maturity at September 30, 1999, by effective maturity, are
reflected in the following table:
<TABLE>
<CAPTION>
Weighted
Average
Book Value Yield
------------- ----------
(Dollars in thousands)
<S> <C> <C>
Due within one year $ 4 7.45%
Due from one to five years 440,579 5.97%
Due after five years up to ten years 210,035 6.19%
Due after ten years 895,565 6.17%
-----------
Total securities held to maturity $ 1,546,183 6.11%
-----------
-----------
</TABLE>
The approximate fair value and weighted average yield of the
Company's securities available for sale at September 30, 1999, by effective
maturity, are reflected in the following table:
<TABLE>
<CAPTION>
Weighted
Average
Book Value Yield
------------- ----------
(Dollars in thousands)
<S> <C> <C>
Due within one year $ 1,961 4.13%
Due from one to five years 272,843 5.66%
Due after five years up to ten years 31,424 5.26%
Due after ten years 52,379 5.22%
-----------
Total securities available for sale $ 358,607 5.55%
-----------
-----------
</TABLE>
LOAN PORTFOLIO
The following table summarizes the Company's loan portfolio for the
dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Loans to individuals $ 54,219 $ 25,583
Loans to not-for-profit organizations 13 13
Loans to mutual funds 73,774 28,796
------------- ------------
$ 128,006 $ 54,392
Less: allowance for loan losses (100) (100)
------------- ------------
Net loans $ 127,906 $ 54,292
------------- ------------
------------- ------------
Floating Rate $ 127,893 $ 54,279
Fixed Rate 13 13
------------- ------------
$ 127,906 $ 54,292
------------- ------------
------------- ------------
</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. The 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.
29
<PAGE>
At September 30, 1999, the Company's only lending concentrations
which exceeded 10% of total loans were the revolving lines of credit to
mutual fund clients 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 or adverse credit actions in the history of the
Company. It is the Company's policy to place a loan on non-accrual status
when either principal or interest becomes 60 days past due and the loan's
collateral is not sufficient to cover both principal and accrued interest. As
of September 30, 1999, 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 $100,000 at September 30, 1999.
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
The Company, like all financial intermediaries, is subject to
interest rate risk. Rapid changes in interest rates could adversely affect
the profitability of the Company by causing changes in the market value of
the Company's assets and its net interest income. Interest rate risk arises
when an earning asset matures or when its rate of interest changes in a time
frame different from that of the supporting interest-bearing liability. By
seeking to minimize the difference between the amount of earning assets and
the amount of interest-bearing liabilities that could change interest rates
in the same time frame, the Company attempts to reduce the risk of
significant adverse effects on net interest income caused by interest rate
changes. The Company does not attempt to match each earning asset with a
specific interest-bearing liability. Instead, as shown in the table below, it
aggregates all of its earning assets and interest-bearing liabilities to
determine the difference between these in specific time frames. This
difference is known as the rate-sensitivity gap. A positive gap indicates
that more earning assets than interest-bearing liabilities mature in a time
frame, and a negative gap indicates the opposite. Maintaining a balanced
position will reduce risk associated with interest rate changes, but it will
not guarantee a stable interest rate spread because the various rates within
a time frame may change by differing amounts and change in different
directions.
The Company seeks to manage interest rate risk by investment
portfolio actions designed to address the interest rate sensitivity of asset
cash flows in relation to liability cash flows. Portfolio actions used to
manage interest rate risk include managing the effective duration of the
portfolio securities and utilizing interest rate floors and interest rate
swaps. Interest rate contracts are used to hedge against large rate swings
and changes in the shape of the yield curve.
Interest rate contracts 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. The Company periodically monitors the financial
stability of its counterparties according to prudent investment guidelines
and established procedures. There can be no assurance that such portfolio
actions will adequately limit interest rate risk.
30
<PAGE>
The following table presents the repricing schedule for the Company's
interest earning assets and interest bearing liabilities at September 30,
1999:
<TABLE>
<CAPTION>
Within Three Six One
Three to Six to Twelve Year to Over Five
Months Months Months Five Years Years Total
------------- ------------ ------------- ------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Investment securities (2) $ 864,454 $ 177,180 $ 214,807 $ 396,148 $ 252,201 $ 1,904,790
Loans - variable rate 127,893 - - - - 127,893
Loans - fixed rate - - - 13 - 13
------------- ------------ ------------- ------------- ------------- --------------
Total interest-earning $ 992,347 $ 177,180 $ 214,807 $ 396,161 $ 252,201 $ 2,032,696
assets
Interest-bearing liabilities:
Demand deposit accounts $ 5,999 $ - $ - $ - $ - $ 5,999
Savings accounts 900,454 - - - - 900,454
Time deposit accounts 21,105 - - - - 21,105
Interest rate contracts (460,000) 30,000 120,000 310,000 - -
Short term borrowings 817,443 - - - - 817,443
------------- ------------ ------------- ------------- ------------- --------------
Total interest-bearing $ 1,285,001 $ 30,000 $ 120,000 $ 310,000 $ - $ 1,745,001
liabilities
------------- ------------ ------------- ------------- ------------- --------------
Net interest sensitivity
gap during the period $ (292,654) $ 147,180 $ 94,807 $ 86,161 $ 252,201 $ 287,695
============= ============ ============= ============= ============= ==============
Cumulative gap $ (292,654) $ (145,474) $ (50,667) $ 35,494 $ 287,695
============= ============ ============= ============= =============
Interest sensitive assets as a
percent of interest sensitive
liabilities (cumulative) 77.23% 88.94% 96.47% 102.03% 116.49%
============= ============ ============= ============= =============
Interest sensitive assets as a
percent of total assets
(cumulative) 45.10% 53.15% 62.92% 80.92% 92.38%
============= ============ ============= ============= =============
Net interest sensitivity gap as a
percent of total assets (13.30%) 6.69% 4.31% 3.92% 11.46%
============= ============ ============= ============= =============
Cumulative gap as a percent
of total assets (13.30%) (6.61%) (2.30%) 1.61% 13.08%
============= ============ ============= ============= =============
</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.
31
<PAGE>
MARKET RISK
The principal objective of the Company's interest rate risk
management function is to evaluate the interest rate risk included in certain
balance sheet accounts, determine the level of appropriate risk given the
Company's business focus, operating environment, capital and liquidity
requirements and performance objectives and manage the risk consistent with
guidelines approved by the Company's Board of Directors. The Board reviews,
on a quarterly basis, the Company's asset/liability position, including
simulations of the effect on the Company's capital of various interest rate
scenarios. The extent of the movement of interest rates, higher or lower, is
an uncertainty that could have a negative impact on the earnings of the
Company.
In the normal course of business, the financial position of the
Company is routinely subject to a variety of risks, including market risks
associated with interest rate movements. The Company regularly assesses these
risks and has established policies and business practices to protect against
the adverse effects of these and other potential exposures. The Company
recognizes that effective management of interest rate risk includes an
understanding of when adverse changes in interest rates will flow through the
statement of income and comprehensive income. Accordingly, the Company will
manage its position so that it monitors its exposure to net interest income
over both a one year planning horizon and a longer term strategic horizon. In
order to manage this interest rate risk, the Company will follow a policy
limit stating that projected net interest income over the next 12 months will
not be reduced by more than 10% given a change in interest rates of up to 200
basis points (+ or -) over 12 months.
The Bank's primary tool in managing interest rate risk in
this manner is an income simulation model wherein the Company projects the
future net interest income derived from the most current projected balance
sheet using a variety of interest rate scenarios. The model seeks to adjust
for cash flow changes arising from the changing interest rates for mortgage
prepayments, callable securities and adjustable rate securities. The
Company also utilizes interest rate swap agreements to manage interest
risk. Interest rate contracts involve an agreement with a counterparty to
exchange cash flows based on an underlying interest rate index. The effect
of these agreements was to lengthen short-term variable rate liabilities
into longer-term fixed rate liabilities.
The results of the sensitivity analysis as of September 30, 1999 and
September 30, 1998, indicated that an upward shift of interest rates by 200
basis points would result in a reduction in projected net interest income of
8.18% and 4.18%, respectively, versus the policy limit of 10%. Conversely, a
downward shift of 200 basis points would result in an increase in projected
net interest income of 6.36% and 3.29%, respectively.
Certain shortcomings are inherent in the methodology used in the
above-described interest rate risk measurement. Modeling changes requires the
making of certain assumptions that may tend to oversimplify the manner in which
actual yield and costs respond to changes in market interest rates. Assumptions
are the underlying factors that drive the interest rate risk measurement system
which include interest rate forecasts, client liability funding, mortgage
prepayment assumptions and portfolio yields. The model assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period will change periodically over the period being
measured. The model also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly, although
the model provides an indication of the Company's interest rate risk exposure at
a particular point in time, this measurement is not intended to and does not
provide a precise forecast of the effect of changes in market interest rates on
the Company's net interest income and actual results will differ. The results of
this modeling are monitored by management and presented to the Board of
Directors quarterly.
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 and 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 $.08 per share.
32
<PAGE>
The Company's ability to pay dividends on the Common Stock may depend
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 January 1997 sale of $25,000,000 in 9.97%
trust preferred securities (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 Company expects
to pay to an annual dividend to its stockholders, currently estimated to be in
an amount equal to $.08 per share of outstanding Common Stock (approximately
$1,164,866 based upon 14,560,825 shares outstanding as of September 30, 1999).
At September 30, 1999 and 1998, cash and cash equivalents were 2% of
total assets. At September 30, 1999, approximately $34 million or 2% of
total 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 September 30, 1999 was $247 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. There can be no
assurance, however, that such funding will be available on a timely basis, if at
all. Lack of availability of liquid funds could have a material adverse impact
on the operations of 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 September
30, 1999 was $1.3 billion.
The Company also has a borrowing arrangement with the Federal Home Loan
Bank of Boston (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
(i) 1% of its outstanding residential mortgage loan principal (including
mortgage pool securities), (ii) 0.3% of total assets, (iii) total advances from
the FHLBB, divided by a leverage factor of 20. 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 September 30, 1999 was $705 million.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities, and
financing activities. Net cash provided by operating activities was $26,500,351
for the nine months ended September 30, 1999. Net cash used for investing
activities, consisting primarily of purchases of investment securities, proceeds
from maturities of investment securities, and purchases of acquisitions was
$708,441,013 for the nine months ended September 30, 1999. Net cash provided by
financing activities, consisting primarily of net activity in deposits, was
$709,695,474 for the nine months ended September 30, 1999.
CAPITAL RESOURCES
Historically, the Company has financed its operations principally
through internally generated cash flows. The Company incurs capital expenditures
for furniture, fixtures and miscellaneous equipment needs. The Company leases
microcomputers through operating leases. Such capital expenditures have been
incurred and such leases entered into on an as-required basis, primarily to meet
the growing operating needs of the Company. As a result, the Company's capital
expenditures were $3,014,165 and $3,669,770 for the nine months ended September
30, 1999 and 1998, respectively.
Stockholders' equity at September 30, 1999 was $129,002,000, an
increase of $40,719,000 or 46%, from $88,283,000 at December 31, 1998. The ratio
of stockholders' equity to assets decreased to 5.86% at September 30, 1999 from
6.02% at December 31, 1998.
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.
33
<PAGE>
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, non-cumulative 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 September 30, 1999:
<TABLE>
<CAPTION>
Amount Ratio
--------------- --------------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $121,261 16.46%
Tier I capital minimum requirement 29,466 4.00%
--------------- --------------
Excess Tier I capital $91,795 12.46%
============== ===============
Total capital $121,361 16.47%
Total capital minimum requirement 58,933 8.00%
--------------- ---------------
Excess Total capital $62,428 8.47%
============== ==============
Risk adjusted assets, net of intangible assets $736,657
==============
</TABLE>
The following table summarizes the Bank's Tier I and total capital
ratios at September 30, 1999:
<TABLE>
<CAPTION>
Amount Ratio
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $118,629 16.14%
Tier I capital minimum requirement 29,395 4.00%
--------------- ---------------
Excess Tier I capital $89,234 12.14%
============== ===============
Total capital $118,729 16.16%
Total capital minimum requirement 58,789 8.00%
--------------- ---------------
Excess Total capital $59,940 8.16%
============== ===============
Risk adjusted assets, net of intangible assets $734,867
==============
</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 and the Bank be reduced by most intangible assets. The
Company's Leverage Ratio at September 30, 1999 was 5.93%, which is in excess of
regulatory requirements. The Bank's Leverage Ratio at September 30, 1999 was
5.81%, which is in excess of regulatory requirements.
34
<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>
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
------------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------- ------------ ------------- ------------- ----------- -------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Federal funds sold and securities
purchased under resale agreements $ 35,661 $ 1,273 4.76% $ 26,381 $ 1,133 5.73%
Investment securities (3) 1,609,894 69,871 5.79% 1,359,896 61,456 6.03%
Loans (4) 75,674 2,460 4.33% 58,742 2,217 5.03%
--------------- ------------ ------------- ------------- ----------- -------------
Total interest earning assets $ 1,721,229 $ 73,604 5.70% $ 1,445,019 $ 64,806 5.98%
------------ ------------- ----------- -------------
Allowance for loan losses (100) (100)
Non-interest-earning assets 131,874 86,372
--------------- -------------
Total assets $ 1,853,003 $ 1,531,291
=============== =============
INTEREST BEARING LIABILITIES
Deposits:
Demand $ 42,185 $ 1,144 3.62% $ 192,001 $ 7,184 4.99%
Savings 884,229 27,814 4.19% 391,589 13,497 4.60%
Time 8,859 325 4.89% 671 26 5.17%
Short term borrowings 592,619 19,479 4.38% 623,439 24,659 5.27%
--------------- ------------ ------------- ------------- ----------- -------------
Total interest bearing liabilities $ 1,527,892 4.26% $ 1,207,700 45,366 5.01%
48,762
------------ ------------- ----------- -------------
Non-interest bearing liabilities
Demand deposits $ 103,001 $ 140,844
Non-interest bearing time 65,000 65,000
deposits
Other liabilities 18,802 14,012
--------------- -------------
Total liabilities 1,714,695 1,427,556
Trust preferred stock 24,199 24,171
Equity 114,109 79,564
--------------- -------------
Total liabilities and equity $ 1,853,003 $ 1,531,291
=============== =============
Net interest income $ 24,842 $ 19,440
============ ===========
Net interest margin (1) 1.92% 1.79%
============= =============
Average interest rate spread (2) 1.44% 0.97%
============= =============
Ratio of interest-earning assets to
interest-bearing liabilities 112.65% 119.65%
============= =============
</TABLE>
1) Net interest income divided by total interest-earning assets.
2) Yield on interest-earning assets less rate paid on interest-bearing
liabilities.
3) Average yield/cost on available for sale securities is based on
amortized cost.
4) Average yield/cost on demand loans includes accrual and non accrual
interest balances.
35
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit 27. Financial Data Schedule
(B) REPORTS ON FORM 8-K. The Company filed no reports on
Form 8-K during the quarter ended September 30, 1999.
36
<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: November 15, 1999 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)
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 46,530,053
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 358,606,504
<INVESTMENTS-CARRYING> 1,546,182,995
<INVESTMENTS-MARKET> 1,525,146,189
<LOANS> 128,005,553
<ALLOWANCE> 100,000
<TOTAL-ASSETS> 2,200,256,239
<DEPOSITS> 1,205,083,525
<SHORT-TERM> 817,443,451
<LIABILITIES-OTHER> 24,516,459
<LONG-TERM> 0
24,210,638
0
<COMMON> 145,717
<OTHER-SE> 128,856,449
<TOTAL-LIABILITIES-AND-EQUITY> 2,200,256,239
<INTEREST-LOAN> 954,009
<INTEREST-INVEST> 27,419,565
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 28,373,574
<INTEREST-DEPOSIT> 10,555,342
<INTEREST-EXPENSE> 19,312,714
<INTEREST-INCOME-NET> 9,060,860
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 34,748,619
<INCOME-PRETAX> 8,615,960
<INCOME-PRE-EXTRAORDINARY> 8,615,960
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,591,495
<EPS-BASIC> .38
<EPS-DILUTED> .37
<YIELD-ACTUAL> 1.86
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 100,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 100,000
<ALLOWANCE-DOMESTIC> 100,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
