<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 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)
DELAWARE 04-3279817
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
200 CLARENDON STREET, P.O. BOX 9130, BOSTON, MA 02117-9130
(Address of principal executive offices, including Zip Code)
(617) 330-6700
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
As of July 31, 1999, there were 14,556,325 shares of Common Stock
outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
PAGE
<S> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
June 30, 1999 (unaudited) and December 31, 1998 (audited) 4
Condensed Consolidated Statements of Income and Comprehensive
Income (unaudited)
Six months ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Income and Comprehensive
Income (unaudited)
Three months ended June 30, 1999 and 1998 6
Condensed Consolidated Statement of Stockholder's Equity (unaudited)
Six months ended June 30, 1999 7
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 36
SIGNATURES 37
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
JUNE 30, 1999 AND DECEMBER 31, 1998
----------------------------------------------------------------------------
ASSETS JUNE 30, DECEMBER 31,
1999 1998
(unaudited)
<S> <C> <C>
Cash and due from banks $ 26,269,492 $ 18,775,240
Federal funds sold and securities purchased under resale agreements 87,000,000 -
Securities held to maturity (approximate fair value of
$1,421,527,921 and $948,645,106 at June 30, 1999
and December 31, 1998, respectively) 1,434,972,349 942,816,546
Securities available for sale 374,445,537 345,069,507
Non-marketable equity securities 7,626,500 7,626,500
Loans, less allowance for loan losses of $100,000
at June 30, 1999 and December 31, 1998 123,467,213 54,291,985
Accrued interest and fees receivable 34,920,288 28,666,818
Equipment and leasehold improvements, net 11,433,277 10,832,688
Goodwill, net 42,973,285 43,767,163
Other assets 15,896,492 13,661,094
----------------------- ---------------------
TOTAL ASSETS $ 2,159,004,433 $ 1,465,507,541
----------------------- ---------------------
----------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 283,676,800 $ 173,207,097
Savings 968,091,826 667,097,468
Time 85,858,500 65,000,000
----------------------- ---------------------
Total deposits 1,337,627,126 905,304,565
Securities sold under repurchase agreements 552,845,211 434,168,072
Short-term borrowings 101,000,000 -
Other liabilities 17,682,436 13,562,592
----------------------- ---------------------
Total liabilities 2,009,154,773 1,353,035,229
----------------------- ---------------------
Commitments and contingencies (Note 8)
Company-obligated, mandatorily redeemable, preferred securities of
subsidiary trust holding solely junior subordinated deferrable interest
debentures of the Company 24,203,561 24,189,409
----------------------- ---------------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued
and outstanding: 0 at 6/30/99 and 12/31/98) - -
Common stock, par value $0.01 (shares authorized: 20,000,000; issued and
outstanding: 14,554,842 at 6/30/99 and 6,722,050 at 12/31/98) 145,792 67,261
Surplus 85,318,408 57,705,468
Deferred compensation (943,592) (1,198,604)
Retained earnings 42,763,163 33,483,703
Accumulated other comprehensive loss, net (1,637,564) (1,774,885)
Treasury stock, par value $0.01 (shares authorized and issued: 10,814 at
6/30/99 and 4,000 at 12/31/98) (108) (40)
----------------------- ---------------------
Total stockholders' equity 125,646,099 88,282,903
----------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,159,004,433 $ 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)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 1,118,845 $ 718,741
Investment securities held to maturity and available for sale 42,605,599 39,715,701
Loans 1,506,103 1,515,539
------------------ ------------------
Total interest income 45,230,547 41,949,981
Interest expense:
Deposits 18,727,563 12,424,457
Short-term borrowings 10,721,802 16,609,154
------------------ ------------------
Total interest expense 29,449,365 29,033,611
------------------ ------------------
Net interest income 15,781,182 12,916,370
Non-interest income:
Asset administration fees 63,471,361 45,023,010
Computer service fees 245,718 272,778
Other operating income 268,485 467,697
Gain on sale of securities available for sale - 471,066
------------------ ------------------
Net operating revenue 79,766,746 59,150,921
OPERATING EXPENSES:
Compensation and benefits 38,852,976 29,346,643
Technology and telecommunications 7,425,665 5,321,853
Transaction processing services 4,293,107 3,961,611
Occupancy 4,039,416 3,417,779
Depreciation and amortization 1,850,388 1,269,811
Amortization of goodwill 886,978 -
Travel and sales promotion 1,084,418 1,002,791
Professional fees 1,690,637 788,258
Insurance 382,484 392,419
Other operating expenses 3,252,578 1,740,738
------------------ ------------------
Total operating expenses 63,758,647 47,241,903
------------------ ------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 16,008,099 11,909,018
Provision for income taxes 5,282,673 4,380,131
Minority interest expense, net of income taxes 818,238 781,600
------------------ ------------------
NET INCOME 9,907,188 6,747,287
------------------ ------------------
Other comprehensive income, net of tax:
Unrealized gain/(loss) on securities:
Unrealized holding gains/(losses) arising during the period 137,321 (1,332,230)
Less: reclassification adjustment for gains/(losses) included in
net income - 301,482
------------------ ------------------
Other comprehensive income/(loss) 137,321 (1,030,748)
------------------ ------------------
COMPREHENSIVE INCOME $ 10,044,509 $ 5,716,539
------------------ ------------------
------------------ ------------------
BASIC EARNINGS PER SHARE $ 0.70 $ 0.50
------------------ ------------------
------------------ ------------------
DILUTED EARNINGS PER SHARE $ 0.68 $ 0.49
------------------ ------------------
------------------ ------------------
</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 JUNE 30, 1999 AND 1998
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 445,793 $ 370,182
Investment securities held to maturity and available for sale 23,857,612 19,752,681
Loans 717,074 846,834
------------------ ------------------
Total interest income 25,020,479 20,969,697
Interest expense:
Deposits 9,390,300 6,773,104
Short-term borrowings 6,999,354 8,404,347
------------------ ------------------
Total interest expense 16,389,654 15,177,451
------------------ ------------------
Net interest income 8,630,825 5,792,246
Non-interest income:
Asset administration fees 32,091,143 23,335,416
Computer service fees 122,435 138,793
Other operating income 138,861 277,110
Gain on sale of securities available for sale - 270,639
------------------ ------------------
Net operating revenue 40,983,264 29,814,204
OPERATING EXPENSES:
Compensation and benefits 19,955,672 14,679,424
Technology and telecommunications 3,805,623 2,715,514
Transaction processing services 2,112,693 1,930,634
Occupancy 2,079,013 1,730,872
Depreciation and amortization 971,737 669,104
Amortization of goodwill 443,023 -
Travel and sales promotion 577,540 586,007
Professional fees 1,045,554 521,622
Insurance 193,337 199,000
Other operating expenses 1,647,587 532,618
------------------ ------------------
Total operating expenses 32,831,779 23,564,795
------------------ ------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 8,151,485 6,249,409
Provision for income taxes 2,454,292 2,322,983
Minority interest expense, net of income taxes 427,438 390,800
------------------ ------------------
NET INCOME 5,269,755 3,535,626
------------------ ------------------
Other comprehensive income, net of tax:
Unrealized gain/(loss) on securities:
Unrealized holding gains/(losses) arising during the period (618,881) (982,881)
Less: reclassification adjustment for gains/(losses) included in
net income - 173,209
------------------ ------------------
Other comprehensive income/(loss) (618,881) (809,672)
------------------ ------------------
COMPREHENSIVE INCOME $ 4,650,874 $ 2,725,954
------------------ ------------------
------------------ ------------------
BASIC EARNINGS PER SHARE $ 0.36 $ 0.26
------------------ ------------------
------------------ ------------------
DILUTED EARNINGS PER SHARE $ 0.35 $ 0.26
------------------ ------------------
------------------ ------------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 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 - - 255,012 -
Stock dividend, two-for-one split 67,980 - - (67,980)
Exercise of stock options 1,551 1,621,872 - -
Treasury stock repurchased - 68 - -
Common stock issuance 9,000 25,991,000 - -
Net income - - - 9,907,188
Cash dividend - - - (559,748)
Change in accumulated other
comprehensive income/(loss), net - - - -
--------------- ---------------- ----------------- -----------------
BALANCE, JUNE 30, 1999 $ 145,792 $ 85,318,408 $ (943,592) $ 42,763,163
--------------- ---------------- ----------------- -----------------
--------------- ---------------- ----------------- -----------------
</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 - - 255,012
Stock dividend, two-for-one split - - -
Exercise of stock options - - 1,623,423
Treasury stock repurchased - (68) -
Common stock issuance - - 26,000,000
Net income - - 9,907,188
Cash dividend - - (559,748)
Change in accumulated other
comprehensive income/(loss), net 137,321 - 137,321
------------------ -------------- ----------------
BALANCE, JUNE 30, 1999 $ (1,637,564) $ (108) $ 125,646,099
------------------ -------------- ----------------
------------------ -------------- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,907,188 $ 6,747,287
---------------------- -----------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,737,366 1,269,811
Amortization of deferred compensation 255,012 295,158
Amortization of premiums on securities, net of accretion of discounts 3,288,144 4,327,659
Deferred income taxes (77,243) -
Loss on sale of securities available for sale - (471,066)
Changes in assets and liabilities:
Accrued interest and fees receivable (6,253,470) (3,633,354)
Other assets (2,328,498) (4,723,213)
Other liabilities 4,119,844 529,552
---------------------- -----------------------
Total adjustments 1,741,155 (2,405,453)
---------------------- -----------------------
Net cash provided by operating activities 11,648,343 4,341,834
---------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 50,848,588 102,805,446
Proceeds from maturities of securities held to maturity 191,814,262 144,378,339
Proceeds from sales of securities available for sale - 81,269,837
Purchases of securities available for sale (81,539,444) (214,530,372)
Purchases of securities held to maturity (685,728,819) (299,386,861)
Purchase of non-marketable equity securities - (2,149,900)
Net (increase)/decrease in federal funds sold and securities
purchased under resale agreements (87,000,000) 40,000,000
Net increase in loans (69,175,228) (13,844,150)
Purchases of equipment and leasehold improvements (2,436,825) (2,295,832)
---------------------- -----------------------
Net cash used for investing activities (683,217,466) (163,753,493)
---------------------- -----------------------
</TABLE>
8
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in demand deposits $ 110,469,703 $ (6,391,161)
Net increase in time and savings deposits 321,852,858 121,684,816
Net increase in short-term borrowings 219,677,139 61,913,157
Proceeds from exercise of stock options 1,623,423 817,855
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 (559,748) (388,623)
------------------------ ----------------------
Net cash provided by financing activities 679,063,375 177,309,044
------------------------ ----------------------
NET INCREASE IN CASH AND DUE FROM BANKS 7,494,252 17,897,385
------------------------ ----------------------
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 18,775,240 17,298,566
------------------------ ----------------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 26,269,492 $ 35,195,951
------------------------ ----------------------
------------------------ ----------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 28,839,000 $ 27,658,000
------------------------ ----------------------
------------------------ ----------------------
Cash paid for income taxes $ 5,886,000 $ 3,817,000
------------------------ ----------------------
------------------------ ----------------------
</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.
See notes to condensed consolidated financial statements.
9
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE SIX MONTHS AND THE THREE MONTHS ENDED JUNE 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 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.
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 June 30, 1999 and 1998 and for the six-month periods
and three-month periods ended June 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 June 30, 1999 or December 31, 1998. In addition, there have been
no loan charge-offs or recoveries during the six months ended June 30,
1999 and 1998. Loans consisted of the following at June 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Loans to individuals $ 43,704,270 $ 25,582,978
Loans to not-for-profit institutions 12,500 12,500
Loans to mutual funds 79,850,443 28,796,507
------------------- -----------------
123,567,213 54,391,985
Less allowance for loan losses 100,000 100,000
------------------- -----------------
Total $ 123,467,213 $ 54,291,985
------------------- -----------------
------------------- -----------------
</TABLE>
The Company had commitments to lend of approximately $149,620,000 and
$141,399,000 at June 30, 1999 and December 31, 1998, respectively. The
terms of these commitments are similar to the terms of outstanding loans.
4. DEPOSITS
Time deposits at June 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 June 30, 1999 and December 31, 1998.
5. SHORT-TERM BORROWINGS
The components of short-term borrowings are as follows at June 30, 1999
and December 31, 1998.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Federal Home Loan Bank of Boston $ 100,000,000 $ -
Treasury, tax and loan account 1,000,000 -
------------------- -----------------
Total $ 101,000,000 $ -
------------------- -----------------
------------------- -----------------
</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 June
30, 1999 was 5.56%.
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 June 30, 1999 was 4.73%.
11
<PAGE>
6. 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.
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, 718,688 were available for grant at June 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. Subsequently, any director elected or appointed after such
date will receive an automatic initial grant of options to purchase 2,500
shares upon becoming a director. Thereafter, each director will receive an
automatic grant of options to purchase 2,500 shares effective upon each
one-year anniversary of the date of such director's original grant.
Additionally, 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.
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 $943,592 and $1,198,604 at June 30, 1999 and December 31,
1998 respectively, related to these grants.
12
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
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 106,505 30
Exercised (283,284) 31
Canceled (12,276) 20
--------------
Outstanding at June 30, 1999 1,216,567 $ 22
--------------
--------------
Outstanding and exercisable at June 30, 1999 607,897
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1997 1,034,568 $ 15
Granted 111,256 25
Exercised (42,460) 23
Canceled (45,212) 11
--------------
Outstanding at June 30, 1998 1,058,152 $ 18
--------------
Outstanding and exercisable at June 30, 1998 352,812
--------------
--------------
</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>
During 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.
During the year ended December 31, 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
$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.
13
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
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 June 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
PER-
SHARE
AMOUNT
INCOME SHARES
<S> <C> <C> <C>
JUNE 30, 1999
BASIC EPS
Income available to common stockholders $ 9,907,188 14,098,591 $ 0.70
------------
------------
Dilutive effect of common equivalent shares of stock options 458,695
----------------
DILUTED EPS
Income available to common stockholders $ 9,907,188 14,557,286 $ 0.68
---------------- ---------------- ------------
---------------- ---------------- ------------
JUNE 30, 1998
BASIC EPS
Income available to common stockholders $ 6,747,287 13,365,562 $ 0.50
------------
------------
Dilutive effect of common equivalent shares of stock options 404,106
----------------
DILUTED EPS
Income available to common stockholders $ 6,747,287 13,769,668 $ 0.49
---------------- ---------------- ------------
---------------- ---------------- ------------
</TABLE>
7. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
LINES OF CREDIT - At June 30, 1999, the Company had commitments to
individuals and mutual funds under collateralized open lines of credit
totaling $202,680,000, against which $53,060,000 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 June 30, 1999 and 1998 were $490,000,000 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 experienced no 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 six 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 rates were 5.75 percent at June
30, 1999. Variable-interest payments received are indexed to the one month
London Interbank Offering Rate. At June 30, 1999, the weighted-average
rate of variable market-indexed interest payment obligations to the
Company was 4.99 percent. 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 $1,317,963 at June 30, 1999.
8. 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 June 30, 1999 was $8,028,000. In
addition, other cash balances in the amounts of $10,000 and $1,632,839
were pledged to secure clearings with depository institutions, National
Securities Clearing Corporation and Depository Trust Company,
respectively, as of June 30, 1999.
14
<PAGE>
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS - Minimum future commitments on non-cancelable operating
leases at June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
Bank Premises Equipment
<S> <C> <C>
1999 $ 3,498,996 $ 1,244,969
2000 6,685,277 1,527,536
2001 6,561,488 729,056
2002 6,091,107 132,912
2003 and beyond 28,444,443 2,920
</TABLE>
Total rent expense was $5,516,000 and $4,443,000 for the six months ended
June 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 $310,000 and
$305,000 for the six months ended June 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 June 30, 1999 that
are material to the consolidated financial position or results of
operations of the Company.
9. 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
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and the Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of June 30, 1999, that the Company and the Bank meet all capital
adequacy requirements to which it is subject.
15
<PAGE>
9. REGULATORY MATTERS (CONTINUED)
As of June 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 June 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 JUNE 30, 1999:
Total Capital
(to Risk Weighted Assets
- the Company) $108,613,939 14.63% $59,396,214 8.00% N/A
Total Capital
(to Risk Weighted
Assets -the Bank) $105,319,286 14.21% $59,278,315 8.00% $74,097,894 10.00%
Tier I Capital
(to Risk Weighted Assets
- the Company) $108,513,939 14.61% $29,698,107 4.00% N/A
Tier I Capital
(to Risk Weighted Assets
-the Bank) $105,219,286 14.20% $29,639,157 4.00% $44,458,736 6.00%
Tier I Capital
(to Average Assets
- the Company) $108,513,939 5.88% $73,800,107 4.00% N/A
Tier I Capital
(to Average Assets
-the Bank) $105,219,286 5.71% $73,748,653 4.00% $92,185,817 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
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
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
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>
10. 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 six months ended June 30,
1999 and 1998, and long-lived assets by geographic area as of June 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 $76,262,262 $55,357,295 $10,854,226 $8,925,295
Ireland 2,207,715 1,873,173 372,296 290,808
Canada 1,232,873 1,816,567 206,755 324,936
Cayman Islands 63,898 103,886 - -
---------------- ---------------- --------------- ----------------
Total $79,766,748 $59,150,921 $11,433,277 $9,541,039
---------------- ---------------- --------------- ----------------
---------------- ---------------- --------------- ----------------
</TABLE>
The following represents the Company's operating revenue by service line
for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
OPERATING OPERATING
REVENUE REVENUE
SERVICE LINES: 1999 1998
------------------------------------- ------------------ --------------------
<S> <C> <C>
Custody, accounting, transfer $57,120,423 $40,545,527
agency, and administration
Investment advisory 749,107 349,224
Securities lending 3,439,826 1,834,326
Foreign exchange 2,407,724 2,566,711
------------------ --------------------
Total $63,717,080 $45,295,788
------------------ --------------------
------------------ --------------------
</TABLE>
No one customer accounted for 10% of the Company's consolidated net
operating revenues for the six months ended June 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 64 mutual fund complexes, investment advisors, banks
and insurance companies. The Company provides financial asset administration
services for net assets that totaled approximately $268 billion at June 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 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 these shares 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 Company paid approximately $48 million to BankBoston as
of the closing and will pay up to an additional $6 million in October of 1999
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 Company acts as custodian for three
BankBoston asset management related businesses: domestic private banking,
institutional asset management and international private banking. The Company
provides transaction processing and asset safekeeping and servicing to the
clients of those businesses.
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.
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 financial results.
Net operating revenue increased 35% to $79,767,000 in the first six months of
1999 from $59,151,000 in the first six 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.
18
<PAGE>
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 and liquidity. 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.
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.
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.
19
<PAGE>
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. As part of the assessment
process, 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. The Company inventoried date sensitive items, assigned
risk ratings and assessed the compliance status of each item. Based on this
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 software and to test such software for Year
2000 compliance. As of June 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.
In addition, as of June 30, 1999 the Company completed integration
testing and validation. 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 two quarters 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 has also continued its 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 has completed all scheduled testing
successfully and is scheduled to complete the remaining testing during the third
quarter of 1999. The Company also participates in the Association of Global
Custodians Year 2000 sub-committee which monitors 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 in the fourth quarter.
20
<PAGE>
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 (1) the
failure to successfully complete renovation, validation, or implementation of
any of our Year 2000 compliance efforts and (2) 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.
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.
In the third quarter of 1999, selected business units will participate
in simulation exercises to test and enhance the effectiveness of the contingency
plans. In addition, the Company created an event management communication center
that will coordinate, control and exchange information relating to Year 2000
efforts and status. Finally, the Company will conduct staff training sessions
during the third and fourth quarters 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.
COSTS
The remaining 1999 cost of the Year 2000 project is estimated to be
$841,000, which will be expensed as incurred. These 1999 costs may include, but
are not limited to, recertification testing, completion of testing with third
parties 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 June 30,
1999, cumulative program expenditures were $3,149,000, of which $1,384,000 were
incurred in the first six 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 simulation exercises
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.
21
<PAGE>
STATEMENT OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Noninterest Income
Noninterest income increased $17,750,000 to $63,985,000 for the six
months ended June 30, 1999 from $46,235,000 for the six months ended June 30,
1998. Noninterest income consists of the following items:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------------------------------------
1999 1998 Change
--------------- -------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $63,471 $45,023 41 %
Computer service fees 246 273 (10)
Other operating income 268 468 (43)
Gain on sale of securities - 471 (100)
--------------- --------------
--------------- --------------
Total Noninterest Income $63,985 $46,235 38 %
--------------- --------------
--------------- --------------
</TABLE>
Asset administration fees increased $18,448,000 to $63,471,000 for the
six months ended June 30, 1999 compared to $45,023,000 for the six months ended
June 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, multicurrency accounting, institutional transfer agency, performance
measurement, foreign exchange, securities lending, mutual fund administration
and investment advisory services. Total net assets processed increased to $268
billion at June 30, 1999 from $164 billion at June 30, 1998. Of the $104 billion
net increase, approximately $71 billion relates to the Company's acquisition of
BankBoston's domestic institutional custody business on October 1, 1998. Of the
remaining $33 billion net increase, approximately 51% 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.
Computer service fees consist of amounts charged by the Company for
data processing services related to client accounts. The decrease in computer
service fees related to the expiration of certain maintenance contracts related
to client accounts. 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 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 $16,517,000 to $63,759,000 for
the six months ended June 30, 1999 compared to $47,242,000 for the six months
ended June 30, 1998. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the Six Months Ended June 30
------------------- --------------- --------------
1999 1998 Change
------------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $ 38,853 $ 29,347 32%
Technology and telecommunications 7,426 5,322 40%
Transaction processing services 4,293 3,962 8%
Occupancy 4,039 3,418 18%
Depreciation and amortization 1,850 1,270 46%
Amortization of goodwill 887 - 100%
Travel and sales promotion 1,084 1,003 8%
Professional fees 1,691 788 114%
Insurance 383 392 (3)%
Other operating expenses 3,253 1,740 87%
------------------- ---------------
Total Operating Expenses $ 63,759 $ 47,242 35%
------------------- ---------------
------------------- ---------------
</TABLE>
Compensation and benefits expense increased by $9,506,000 or 32% from
period to period due to several factors. The average number of employees
increased 26% to 1,341 during the six months ended June 30, 1999 from 1,068
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 $1,460,000 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 $1,192,000 for the six
months ended June 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 $2,104,000 from period to period. Expenses
related to the conversion of the BankBoston business, and on-going support
accounted for $1,169,000 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 $520,000 of the increase. Fees charged
by EDS increased $267,000 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.
Occupancy expense increased $621,000 to $4,039,000 for the six months
ended June 30, 1999 from $3,418,000 for the six months ended June 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 and Dublin locations.
Depreciation and amortization expense increased $580,000 to $1,850,000
for the six months ended June 30, 1999 from $1,270,000 for the six months ended
June 30, 1998. Of the increase, $217,000 related to software costs capitalized
under SOP 98-1 throughout 1998 which were placed in service in 1999.
Also contributing to the increase was depreciation relating to fixed assets
acquired from BankBoston.
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.
23
<PAGE>
Professional fees increased $903,000 to $1,691,000 for the six months
ended June 30, 1999 from $788,000 for the six months ended June 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 Banking
Commission. These expenses increased $1,513,000 to $3,253,000 for the six months
ended June 30, 1999 from $1,740,000 for the six months ended June 30, 1998.
Recruiting costs accounted for $436,000 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 six months ended June 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 $ 501 $ (101) $ 400
Investment securities 4,724 (1,835) 2,889
Loans (111) 102 (9)
------------ -------------- ------------
Total interest-earning assets $ 5,114 $ (1,834) $ 3,280
------------ -------------- ------------
INTEREST-BEARING LIABILITIES
Deposits $ 7,428 $ (1,126) $ 6,302
Borrowings (2,870) (3,017) (5,887)
------------ -------------- ------------
Total interest-bearing liabilities $ 4,558 $ (4,143) $ 415
------------ -------------- ------------
Change in net interest income $ 556 $ 2,309 $ 2,865
------------ -------------- ------------
------------ -------------- ------------
</TABLE>
Net interest income increased $2,865,000 or 22% to $15,781,000 for the
six months ended June 30, 1999 from $12,916,000 for the same period in 1998.
This net increase resulted from an increase in interest income of $3,280,000
offset by an increase in interest expense of $415,000. The net impact of the
above changes was a 13 basis point increase in net interest margin.
The increase in net interest income resulted primarily 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 14% compared to the same period in
1998.
Interest expense increased due to a 23% increase in average
interest-bearing liabilities. The increase in average interest-bearing
liabilities was offset in part by a decrease in the average interest rate paid
by the Company from 5.03% to 4.14% during the period.
24
<PAGE>
Income Taxes
Taxes for the six months ended June 30, 1999 were $5.3 million, up from
$4.4 million a year ago. The effective tax rate for the period was 33%, which
compares to 37% 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 JUNE 30, 1999 AND 1998
Noninterest Income
Noninterest income increased $8,330,000 to $32,352,000 for the quarter
ended June 30, 1999 from $24,022,000 for the quarter ended June 30, 1998.
Noninterest income consists of the following items:
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
-------------------------------------------------------
1999 1998 Change
--------------- -------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $32,091 $23,335 38 %
Computer service fees 122 139 (12) %
Other operating income 139 277 (50) %
Gain on sale of securities - 271 (100) %
--------------- --------------
Total Noninterest Income $32,352 $24,022 35 %
--------------- --------------
--------------- --------------
</TABLE>
Asset administration fees increased $8,756,000 to $32,091,000 for the
quarter ended June 30, 1999 compared to $23,335,000 for the quarter ended June
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 $268 billion at June 30, 1999 from $164
billion at June 30, 1998. Of the $104 billion net increase, approximately $71
billion relates to the Company's acquisition of BankBoston's domestic
institutional custody business on October 1, 1998. Of the remaining $33 billion
net increase, approximately 51% 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.
Computer service fees consist of amounts charged by the Company for
data processing services related to client accounts. The decrease in computer
service fees related to the expiration of certain maintenance contracts related
to client accounts. 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 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.
25
<PAGE>
Operating Expenses
Total operating expenses increased by $9,267,000 to $32,832,000 for the
quarter ended June 30, 1999 compared to $23,565,000 for the quarter ended June
30, 1998. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
------------------- --------------- --------------
1999 1998 Change
------------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $19,956 $14,679 36%
Technology and telecommunications 3,806 2,715 40%
Transaction processing services 2,113 1,931 9%
Occupancy 2,079 1,731 20%
Depreciation and amortization 972 669 45%
Amortization of goodwill 443 - 100%
Travel and sales promotion 577 586 (2)%
Professional fees 1,045 522 100%
Insurance 193 199 (3)%
Other operating expenses 1,648 533 209%
------------------- ---------------
Total Operating Expenses $32,832 $23,565 39%
------------------- ---------------
------------------- ---------------
</TABLE>
Compensation and benefits expense increased by $5,277,000 or 36% from
period to period due to several factors. The average number of employees
increased 27% to 1,374 during the quarter ended June 30, 1999 from 1,078 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 $910,000 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 $669,000 for the quarter ended June 30, 1999 from
the same period in 1998.
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 $1,091,000 from period to period. Expenses
related to the conversion of the BankBoston business, and on-going support
accounted for $612,000 of the increase. Fees charged by EDS increased $219,000
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 $184,000 of the increase.
Increased hardware and software expenses needed to support the growth in assets
processed comprised the remainder of the increase.
Occupancy expense increased $348,000 to $2,079,000 for the quarter
ended June 30, 1999 from $1,731,000 for the quarter ended June 30, 1998. The
increase resulted from the temporary rental of office space relating to the
BankBoston business, along with expansion of office space in the Company's
Boston and Dublin locations.
Depreciation and amortization expense increased $303,000 to $972,000
for the quarter ended June 30, 1999 from $669,000 for the quarter ended June 30,
1998. Of the increase, $108,000 related to software costs capitalized under SOP
98-1 throughout 1998 and had been placed in service in 1999. The remainder of
the increase related to fixed assets acquired due to increased headcount and
office space.
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.
26
<PAGE>
Professional fees increased $523,000 to $1,045,000 for the quarter
ended June 30, 1999 from $522,000 for the quarter ended June 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 Banking
Commission. These expenses increased $1,115,000 to $1,648,000 for the quarter
ended June 30, 1999 from $533,000 for the quarter ended June 30, 1998.
Recruiting costs accounted for $323,000 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 June 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 $ 122 $ (46) $ 76
Investment securities 4,485 (380) 4,105
Loans 234 (364) (130)
------------ ------------- -------------
Total interest-earning assets $ 4,841 $ (790) $ 4,051
------------ ------------- -------------
INTEREST-BEARING LIABILITIES
Deposits $ 5,169 $ (2,552) $ 2,617
Borrowings 378 (1,783) (1,405)
------------ ------------- -------------
Total interest-bearing liabilities 5,547 $ (4,335) $ 1,212
------------ ------------- -------------
Change in net interest income $ (706) $ 3,545 $ 2,839
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
Net interest income increased $2,839,000 or 49% to $8,631,000 for the
quarter ended June 30, 1999 from $5,792,000 for the same period in 1998. This
net increase resulted from an increase in interest income of $4,051,000, offset
by an increase in interest expense of $1,212,000. The net impact of the above
change was a 34 basis increase in net interest margin.
The increase in interest income resulted primarily 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 23% compared to the same period in 1998.
Interest expense increased due primarily to a 13% increase in
interest-bearing liabilities. Slightly offsetting the increase in
interest-bearing liabilities was a decrease in the average interest rate paid by
the Company from 5.08% to 4.20% during the period.
27
<PAGE>
Income Taxes
Taxes for the quarter ended June 30, 1999 were $2.5 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>
June 30, December 31,
1999 1998
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
SECURITIES HELD TO MATURITY:
State and political subdivisions $ 63,445 $ 35,821
Mortgage-backed securities 1,164,015 733,109
Federal agency securities 199,840 166,181
Foreign government securities 7,672 7,706
-------------------- -------------------
Total securities held to maturity $ 1,434,972 $ 942,817
-------------------- -------------------
-------------------- -------------------
SECURITIES AVAILABLE FOR SALE:
State and political subdivisions $ 36,760 $ 37,577
Corporate debt 48,150 48,070
Federal agency securities 53,270 -
Mortgage-backed securities 236,266 259,422
-------------------- -------------------
Total securities available for sale $ 374,446 $ 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 June 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 from one to five years $ 386,216 6.04%
Due after five years up to ten years 201,978 5.95%
Due after ten years 846,778 6.04%
-----------------
Total securities held to maturity $1,434,972 6.03%
-----------------
-----------------
</TABLE>
The approximate fair value and weighted average yield of the Company's
securities available for sale at June 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 $ 449 4.10%
Due from one to five years 285,471 5.74%
Due after five years up to ten years 34,167 5.26%
Due after ten years 54,359 5.39%
-----------------
Total securities available for sale $ 374,446 5.64%
-----------------
-----------------
</TABLE>
LOAN PORTFOLIO
The following table summarizes the Company's loan portfolio for the
dates indicated:
<TABLE>
June 30, December 31,
1999 1998
-------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Loans to individuals $ 43,704 $ 25,583
Loans to not-for-profit 13 13
organizations
Loans to mutual funds 79,850 28,796
------------- ---------------
123,567 54,392
Less: allowance for loan losses (100) (100)
------------- ---------------
Net loans $ 123,467 $ 54,292
------------- ---------------
------------- ---------------
Floating Rate $ 123,454 $ 54,279
Fixed Rate 13 13
------------- ---------------
$ 123,467 $ 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.
At June 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.
29
<PAGE>
The Company's credit loss experience has been excellent. There have
been no loan chargeoffs or adverse credit actions in the history of the Company.
It is the Company's policy to place a loan on non-accrual status when either
principal or interest becomes 60 days past due and the loan's collateral is not
sufficient to cover both principal and accrued interest. As of June 30, 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 June 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 June 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):
Federal Funds sold $ 87,000 $ - $ - $ - $ - $ 87,000
Investment securities (2) 820,078 134,360 217,695 368,403 268,881 1,809,417
Loans - fixed rate 123,454 - - - - 123,454
Loans - variable rate - - - 13 - 13
-------------- ------------- ------------- ------------- -------------- --------------
Total interest-earning
assets $ 1,030,532 $ 134,360 $ 217,695 $ 368,416 $ 268,881 $ 2,019,884
Interest-bearing liabilities:
Demand deposit accounts $ 6,130 $ - $ - $ - $ - $ 6,130
Savings accounts 969,092 - - - - 969,092
Time deposit accounts 20,859 - - - - 20,859
Interest rate contracts (430,000) 30,000 100,000 300,000 - -
Short term borrowings 652,845 - - - - 652,845
-------------- ------------- ------------- ------------- -------------- --------------
Total interest-bearing
liabilities $ 1,218,926 $ 30,000 $ 100,000 $ 300,000 $ - $ 1,648,926
-------------- ------------- ------------- ------------- -------------- --------------
Net interest sensitivity
gap during the period ($ 188,394) $ 104,360 $ 117,695 $ 68,416 $ 268,881 $ 370,958
-------------- ------------- ------------- ------------- -------------- --------------
-------------- ------------- ------------- ------------- -------------- --------------
Cumulative gap ($ 188,394) ($ 84,034) $ 33,661 $ 102,077 $ 370,958
-------------- ------------- ------------- ------------- --------------
-------------- ------------- ------------- ------------- --------------
Interest sensitive assets as a
percent of interest sensitive
liabilities (cumulative) 84.54% 93.27% 102.50% 106.19% 122.50%
-------------- ------------- ------------- ------------- --------------
-------------- ------------- ------------- ------------- --------------
Interest sensitive assets as a
percent of total assets
(cumulative) 47.73% 53.96% 64.04% 81.10% 93.56%
-------------- ------------- ------------- ------------- --------------
-------------- ------------- ------------- ------------- --------------
Net interest sensitivity gap as a
percent of total assets (8.73%) 4.83% 5.45% 3.17% 12.45%
-------------- ------------- ------------- ------------- --------------
-------------- ------------- ------------- ------------- --------------
Cumulative gap as a percent
of total assets (8.73%) (3.89%) 1.56% 4.73% 17.18%
-------------- ------------- ------------- ------------- --------------
-------------- ------------- ------------- ------------- --------------
</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 June 30, 1999 and June
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 8.37% and 6.22%,
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
6.71% and 5.42%, 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, fees collected
from asset administration clients, and the capital raised from the sale of the
Capital Securities. Asset liquidity is also provided by managing the duration of
the investment portfolio. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funds, management
believes that the Company maintains overall liquidity sufficient to meet its
depositors' needs, to satisfy its operating requirements and to fund the payment
of an anticipated annual cash dividend of approximately $.08 per share.
The Company's ability to pay dividends on the Common Stock 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 sale of the Capital Securities. Any dividend
payments by the Bank are subject to
32
<PAGE>
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 $1,164,387 based upon 14,554,842
shares outstanding as of June 30, 1999).
At June 30, 1999 and 1998, cash and cash equivalents were 1% of total
assets. At June 30, 1999, approximately $22 million or 1% 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 June 30, 1999 was $236 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 June 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 June 30, 1999 was $810 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 $11,648,343
for the six months ended June 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
$683,217,466 for the six months ended June 30, 1999. Net cash provided by
financing activities, consisting primarily of net activity in deposits, was
$679,063,375 for the six months ended June 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 $2,436,825 and $2,295,832 for the six months ended June 30,
1999 and 1998, respectively.
Stockholders' equity at June 30, 1999 was $125,646,000, an increase of
$37,363,000 or 42%, from $88,283,000 at December 31, 1998. The ratio of
stockholders' equity to assets decreased to 5.82% at June 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.
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.
33
<PAGE>
The following table summarizes the Company's Tier I and total capital
ratios at June 30, 1999:
<TABLE>
<CAPTION>
Amount Ratio
-------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 108,514 14.61%
Tier I capital minimum requirement 29,698 4.00%
-------------- ---------------
Excess Tier I capital $ 78,819 10.61%
-------------- ---------------
-------------- ---------------
Total capital $ 108,614 14.63%
Total capital minimum requirement 59,396 8.00%
-------------- ---------------
Excess Total capital $ 49,218 6.63%
-------------- ---------------
-------------- ---------------
Risk adjusted assets, net of intangible assets $ 742,453
--------------
--------------
</TABLE>
The following table summarizes the Bank's Tier I and total capital
ratios at June 30, 1999:
<TABLE>
<CAPTION>
Amount Ratio
-------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $105,219 14.20%
Tier I capital minimum requirement 29,639 4.00%
-------------- ---------------
Excess Tier I capital $ 75,580 10.20%
-------------- ---------------
-------------- ---------------
Total capital $105,319 14.21%
Total capital minimum requirement 59,278 8.00%
-------------- ---------------
Excess Total capital $ 46,041 6.21%
-------------- ---------------
-------------- ---------------
Risk adjusted assets, net of intangible assets $740,979
--------------
--------------
</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 June 30, 1999 was 5.88%, which is in excess of
regulatory requirements. The Bank's Leverage Ratio at June 30, 1999 was 5.71%,
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>
Six Months Ended June 30, 1999 Six Months Ended June 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 $ 47,494 1,119 4.71% $ 24,961 $ 719 5.76%
Investment securities (3) 1,488,259 42,605 5.73% 1,317,464 39,716 6.03%
Loans (4) 67,713 1,506 4.45% 59,506 1,515 5.09%
-------------- ------------- ------------ -------------- ----------- --------------
Total interest earning assets 1,603,466 $ 45,230 5.64% 1,401,931 $ 41,950 5.98%
------------- ------------ ----------- --------------
Allowance for loan losses (100) (100)
Non-interest-earning assets 130,050 84,121
-------------- --------------
Total assets $ 1,733,416 $ 1,485,952
-------------- --------------
-------------- --------------
INTEREST BEARING LIABILITIES
Deposits:
Demand $ 59,589 $ 1,348 4.52% $ 192,611 $ 4,830 5.02%
Savings 850,222 17,314 4.07% 331,432 7,572 4.57%
Time 2,766 65 4.70% 870 23 5.29%
Short term borrowings 509,573 10,722 4.21% 630,376 16,609 5.27%
-------------- ------------- ------------ -------------- ----------- --------------
Total interest bearing liabilities 1,422,150 $ 29,499 4.14% $ 1,155,289 $ 29,034 5.03%
------------- ------------ ----------- --------------
Non-interest bearing liabilities
Demand deposits 97,749 148,683
Non-interest bearing time 65,000 65,000
deposits
Other liabilities 17,167 784
-------------- --------------
Total liabilities 1,602,066 1,383,756
Trust preferred stock 24,195 167
Equity 107,155 78,029
-------------- --------------
Total liabilities and equity $ 1,733,416 $ 1,485,952
-------------- --------------
-------------- --------------
Net interest income $ 15,731 $ 12,916
------------- -----------
------------- -----------
Net interest margin (1) 1.97% 1.84%
------------ --------------
------------ --------------
Average interest rate spread (2) 1.50% 0.95%
------------ --------------
------------ --------------
Ratio of interest-earning assets to
interest-bearing liabilities 112.75% 121.35%
------------ --------------
------------ --------------
</TABLE>
1) Net interest income divided by total interest-earning assets.
2) Yield on interest-earning assets less rate paid on interest-bearing
liabilities.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Annual Meeting of Stockholders was held on April 13, 1999.
b. Not applicable
A vote was proposed to (1) elect Donald G. Friedl and Phyllis S. Swersky,
current directors of the Company, as Class I Directors of the Company to serve
for a three year term; (2) to consider and act upon a proposal to approve the
Company's Amended and Restated 1995 Non-Employee Director Stock Option Plan; and
(3) ratify the selection of Deloitte & Touche LLP as independent accountants for
the Company for the fiscal year ending December 31, 1999.
The voting results are as follows:
<TABLE>
<CAPTION>
Votes Votes Broker
Matter Votes For* Against* Withheld* Abstained*
------ ---------- -------- --------- ----------
<S> <C> <C> <C> <C>
(1) Donald G. Friedl 5,206,268 N/A 4,574 N/A
Phyllis S. Swersky 5,206,268 N/A 4,574 N/A
(2) Amended and Restated 3,745,623 1,359,492 N/A 105,727
1995 Non-Employee
Director Stock
Option Plan
(3) Deloitte & Touche 5,198,416 5,959 N/A 6,467
</TABLE>
* All share numbers shown in this table DO NOT reflect the two-for-one
stock split which was paid on March 17, 1999, after the record date
for the Annual Meeting of Stockholders.
d. Not applicable
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 June 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: August 13, 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> JUN-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 26,269,492
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 87,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 374,445,537
<INVESTMENTS-CARRYING> 1,434,972,349
<INVESTMENTS-MARKET> 1,421,527,921
<LOANS> 123,567,213
<ALLOWANCE> 100,000
<TOTAL-ASSETS> 2,159,004,433
<DEPOSITS> 1,337,627,126
<SHORT-TERM> 653,845,211
<LIABILITIES-OTHER> 17,682,436
<LONG-TERM> 0
24,203,561
0
<COMMON> 145,792
<OTHER-SE> 125,500,307
<TOTAL-LIABILITIES-AND-EQUITY> 2,159,004,433
<INTEREST-LOAN> 717,074
<INTEREST-INVEST> 24,303,405
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 25,020,479
<INTEREST-DEPOSIT> 9,390,300
<INTEREST-EXPENSE> 16,389,654
<INTEREST-INCOME-NET> 8,630,825
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 32,831,779
<INCOME-PRETAX> 8,151,485
<INCOME-PRE-EXTRAORDINARY> 8,151,485
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,269,755
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 1.97
<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>
