<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, 2000
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, 2000, there were 29,800,539 shares of Common Stock
outstanding.
--------------------------------------------------------------------------------
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999 (audited) 3
Condensed Consolidated Statements of Income and Comprehensive
Income (unaudited)
Six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Income and Comprehensive
Income (unaudited)
Three months ended June 30, 2000 and 1999 5
Condensed Consolidated Statement of Stockholder's Equity (unaudited)
Six months ended June 30, 2000 6
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2000 and 1999 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 18
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 35
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 35
ITEM 5. OTHER INFORMATION 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 36
SIGNATURES 37
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
ASSETS (unaudited)
<S> <C> <C>
Cash and due from banks $ 12,943 $ 37,624
Federal funds sold - 150,000
Securities held to maturity (approximate fair value of $1,971,951 and
$1,730,745 at June 30, 2000 and December 31, 1999, respectively) 2,014,058 1,763,355
Securities available for sale 552,886 375,610
Non-marketable equity securities 15,000 15,000
Loans, less allowance for loan losses of $100 at June 30, 2000 and
December 31, 1999 112,904 109,292
Accrued interest and fees receivable 42,443 40,332
Equipment and leasehold improvements, less accumulated depreciation of $9,203 and
$8,615 at June 30, 2000 and December 31, 1999, respectively 12,264 10,337
Goodwill, net 34,843 39,776
Other assets 14,320 11,754
----------- -----------
TOTAL ASSETS $ 2,811,661 $ 2,553,080
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 173,773 $ 240,303
Savings 1,144,486 1,237,104
Time 89,688 75,000
----------- -----------
Total deposits 1,407,947 1,552,407
Securities sold under repurchase agreements 861,854 819,034
Short-term borrowings 316,001 1,000
Other liabilities 45,549 19,583
----------- -----------
Total liabilities 2,631,351 2,392,024
----------- -----------
Commitments and contingencies - -
Company-obligated, mandatorily redeemable, preferred securities of subsidiary
trust holding solely junior subordinated deferrable interest debentures of the
Company 24,232 24,218
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and
outstanding: 0 at June 30, 2000 and December 31, 1999) - -
Common stock, par value $0.01 (shares authorized: 40,000,000 at June 30, 2000
and 20,000,000 at December 31, 1999; issued and outstanding: 29,759,258 at
June 30, 2000 and 14,610,154 at December 31, 1999) 298 146
Surplus 91,875 87,320
Deferred compensation (434) (689)
Retained earnings 67,893 53,542
Accumulated other comprehensive loss, net (3,554) (3,481)
Treasury stock, par value $0.01 (10,814 shares at June 30, 2000 and December
31, 1999) - -
----------- -----------
Total stockholders' equity 156,078 136,838
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,811,661 $ 2,553,080
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 1,262 $ 1,119
Investment securities held to maturity and available for sale 75,687 42,605
Loans 2,812 1,506
--------- ---------
Total interest income 79,761 45,230
Interest expense:
Deposits 25,356 18,727
Short-term borrowings 28,418 10,722
--------- ---------
Total interest expense 53,774 29,449
--------- ---------
Net interest income 25,987 15,781
Non-interest income:
Asset administration fees 79,155 63,471
Computer service fees 239 246
Other operating income 564 268
--------- ---------
Net operating revenue 105,945 79,766
OPERATING EXPENSES:
Compensation and benefits 50,411 38,853
Technology and telecommunications 10,155 7,426
Occupancy 5,107 4,039
Transaction processing services 5,013 4,293
Depreciation and amortization 2,190 1,850
Professional fees 1,566 1,691
Travel and sales promotion 1,520 1,084
Amortization of goodwill 826 887
Insurance 395 382
Other operating expenses 4,913 3,253
--------- ---------
Total operating expenses 82,096 63,758
--------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 23,849 16,008
Provision for income taxes 7,668 5,283
Minority interest expense, net of income taxes 794 818
--------- ---------
NET INCOME 15,387 9,907
--------- ---------
Other comprehensive income, net of tax of ($34) and $77 respectively:
Unrealized (loss)/gain on securities:
Unrealized holding (losses)/gains arising during the period (73) 137
--------- ---------
Other comprehensive (loss)/income (73) 137
--------- ---------
COMPREHENSIVE INCOME $ 15,314 $ 10,044
========= =========
BASIC EARNINGS PER SHARE $ 0.52 $ 0.35
========= =========
DILUTED EARNINGS PER SHARE $ 0.50 $ 0.34
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 364 $ 446
Investment securities held to maturity and available for sale 40,207 23,857
Loans 1,396 717
-------- --------
Total interest income 41,967 25,020
Interest expense:
Deposits 12,846 9,390
Short-term borrowings 16,091 6,999
-------- --------
Total interest expense 28,937 16,389
-------- --------
Net interest income 13,030 8,631
Non-interest income:
Asset administration fees 39,439 32,091
Computer service fees 118 123
Other operating income 289 138
-------- --------
Net operating revenue 52,876 40,983
OPERATING EXPENSES:
Compensation and benefits 23,884 19,956
Technology and telecommunications 5,560 3,806
Occupancy 3,035 2,078
Transaction processing services 2,494 2,113
Depreciation and amortization 1,147 971
Professional fees 492 1,046
Travel and sales promotion 851 577
Amortization of goodwill 405 443
Insurance 200 193
Other operating expenses 2,254 1,648
-------- --------
Total operating expenses 40,322 32,831
-------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 12,554 8,152
Provision for income taxes 4,036 2,455
Minority interest expense, net of income taxes 397 427
-------- --------
NET INCOME 8,121 5,270
-------- --------
Other comprehensive income, net of tax of ($457) and ($348), respectively:
Unrealized loss on securities:
Unrealized holding losses arising during the period (971) (619)
-------- --------
Other comprehensive loss (971) (619)
-------- --------
COMPREHENSIVE INCOME $ 7,150 $ 4,651
======== ========
BASIC EARNINGS PER SHARE $ 0.27 $ 0.18
======== ========
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.18
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
COMMON TREASURY COMMON DEFERRED
SHARES SHARES STOCK SURPLUS COMPENSATION
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 14,610,154 10,814 $ 146 $ 87,320 $ (689)
Amortization of
deferred - - - - 255
compensation
Exercise of stock options 290,958 - 3 2,320 -
Tax benefit from exercise
of options - - - 2,235 -
Net income - - - - -
Stock dividend, two-for-one split 14,858,146 - 149 - -
Cash dividend, $0.015 per share - - - - -
Change in accumulated
other comprehensive income/(loss), net - - - - -
---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 2000 29,759,258 10,814 $ 298 $ 91,875 $ (434)
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE TREASURY
EARNINGS LOSS STOCK TOTAL
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999
Amortization of $ 53,542 $ (3,481) $ - $ 136,838
deferred
compensation - - - 255
Exercise of stock options
Tax benefit from exercise - - - 2,323
of options
Net income - - - 2,235
Stock dividend, two-for-one split 15,387 - - 15,387
Cash dividend, $0.015 per share (149) - - -
Change in accumulated (887) - - (887)
other comprehensive income/(loss), net
- (73) - (73)
BALANCE, JUNE 30, 2000 ---------- ---------- ----------- ----------
$ 67,893 $ (3,554) $ - $ 156,078
========== ========== =========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,387 $ 9,907
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,016 2,737
Amortization of deferred compensation 255 255
Amortization of premiums on securities, net of accretion of discounts 1,935 3,288
Deferred income taxes - (77)
Changes in assets and liabilities:
Accrued interest and fees receivable (2,111) (6,253)
Other assets 3,808 (2,329)
Other liabilities 25,966 4,120
--------- ---------
Total adjustments 32,869 1,741
--------- ---------
Net cash provided by operating activities 48,256 11,648
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 31,031 50,849
Proceeds from maturities of securities held to maturity 106,547 191,814
Purchases of securities available for sale (209,257) (81,539)
Purchases of securities held to maturity (358,341) (685,729)
Net decrease/(increase) in federal funds sold and securities
purchased under resale agreements 150,000 (87,000)
Net increase in loans (3,612) (69,175)
Purchases of equipment and leasehold improvements (4,102) (2,437)
--------- ---------
Net cash used for investing activities (287,734) (683,217)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease)/increase in demand deposits (66,530) 110,470
Net (decrease)/increase in time and savings deposits (77,930) 321,853
Net increase in short-term borrowings 357,821 219,677
Proceeds from exercise of stock options 2,323 1,623
Proceeds from issuance of common stock - 26,000
Cash dividends to IFSC shareholders (887) (560)
--------- ---------
Net cash provided by financing activities 214,797 679,063
--------- ---------
NET (DECREASE) / INCREASE IN CASH AND DUE FROM BANKS (24,681) 7,494
--------- ---------
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 37,624 18,775
--------- ---------
CASH AND DUE FROM BANKS, END OF PERIOD $ 12,943 $ 26,269
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 52,211 $ 28,839
========= =========
Cash paid for income taxes $ 5,863 $ 5,886
========= =========
</TABLE>
See notes to condensed consolidated financial statements
7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE SIX MONTHS AND THE THREE MONTHS ENDED JUNE 30,
2000 AND 1999 IS UNAUDITED)
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Investors Financial Services Corp. ('IFSC') provides asset administration
services for the financial services industry through its wholly owned
subsidiary, Investors Bank & Trust Company (the 'Bank'). 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 October 1, 1998, the Bank acquired the domestic institutional trust and
custody business ('the Business') of BankBoston, N.A. Under the terms of
the purchase agreement, the Bank paid approximately $48 million to
BankBoston as of the closing and subsequently paid an additional $4.9
million based upon client retention and business performance. The Business
provides master trust and custody services to endowments, pension funds,
municipalities, mutual funds and other financial institutions, primarily
in New England. The acquisition was accounted for using the purchase
method of accounting. In connection with the acquisition, the Bank and
BankBoston also entered into an outsourcing agreement. Pursuant to the
outsourcing agreement, the Bank acted as custodian and provided certain
other services for three BankBoston asset management related businesses:
domestic private banking, institutional asset management and international
private banking. In September 1999, the Bank received notification of
BankBoston's intent to terminate the outsourcing agreement. The
termination, effective February 2000, had no impact on the remaining
business purchased from BankBoston. Pursuant to the terms of the
outsourcing agreement, the Bank received a termination fee of $7 million.
In addition, in May 2000, the Bank received notification from the
BankBoston sponsored 1784 Funds that the 1784 Funds intended to terminate
their custody agreement with the Bank. Pursuant to the terms of the
purchase agreement with BankBoston, the Bank received a termination fee of
$4.3 million in connection with termination of the 1784 Funds custody
agreement. Therefore, a net adjustment was made to decrease the purchase
price by $6.4 million resulting from the above mentioned items. The Bank
does not anticipate a material impact on net income due to the termination
of the outsourcing agreement or the termination of the 1784 funds custody
agreement. The Bank was informed by BankBoston that its decision to
terminate both the outsourcing and the 1784 Funds custody agreement was
not related in any way to the Company's quality of service but was made as
part of the integration process undertaken in connection with the
BankBoston/Fleet merger.
On October 29, 1999, the Bank entered into an agreement with Sanwa Bank
California, pursuant to which the Bank agreed to purchase the right to
provide institutional custody and related services to accounts managed by
the Trust Company of the West. The Bank completed the purchase on March
10, 2000. The accounts subject to the agreement totaled approximately $4.6
billion in assets at March 10, 2000.
On March 26, 1999, the Company completed the issuance and sale of
1,800,000 shares of Common Stock at $14.50 per share in a private
placement to one investor. The net capital raised in the private placement
was used to support the Company's balance sheet growth.
On May 15, 2000, the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100% stock dividend payable June
15, 2000 to stockholders of record on May 31, 2000.
8
<PAGE>
2. INTERIM FINANCIAL STATEMENTS
The condensed consolidated interim financial statements of the Company as
of June 30, 2000 and 1999 and for the six-month periods and three-month
periods ended June 30, 2000 and 1999 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, where applicable, to
reflect the two-for-one stock split paid June 15, 2000.
Certain amounts in the prior periods' financial statements have been
reclassified to conform to the current periods' presentation.
3. LOANS
Loans consist of demand loans to custody clients of the Company, including
individuals, 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. In addition, there
have been no loan charge-offs or recoveries during the six months ended
June 30, 2000 and 1999. Loans are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(Dollars in thousands)
<S> <C> <C>
Loans to individuals $ 33,786 $ 65,010
Loans to not-for-profit institutions 13 13
Loans to mutual funds 79,205 44,369
-------- --------
113,004 109,392
Less allowance for loan losses 100 100
-------- --------
Total $112,904 $109,292
======== ========
</TABLE>
The Company had commitments to lend of approximately $186 million and $160
million at June 30, 2000 and December 31, 1999, respectively. The terms of
these commitments are similar to the terms of outstanding loans.
9
<PAGE>
4. GOODWILL
Goodwill related to the Company's acquisition of the BankBoston Business
pursuant to a purchase and sale agreement dated July 17, 1998 is
summarized as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE TWELVE
MONTHS ENDED MONTHS ENDED
JUNE 30, DECEMBER 31,
2000 1999
(Dollars in thousands)
<S> <C> <C>
Goodwill, beginning of period $ 39,776 $ 43,860
Purchase price adjustment (4,107) (2,328)
Less amortization for period (826) (1,756)
-------- --------
Goodwill, end of period $ 34,843 $ 39,776
======== ========
</TABLE>
Under the terms of the purchase agreement with BankBoston, N.A., the Bank
paid approximately $44 million, attributable to goodwill, to BankBoston as
of the closing of the transaction on October 1, 1998 and paid an
additional amount of approximately $4.9 million in February 2000 based
upon client retention and business performance. In September 1999, the
Bank received notification from BankBoston of its intent to terminate an
outsourcing agreement, under which the Bank provided custody services to
certain BankBoston asset management related businesses. In May 2000, the
Bank received notification from the 1784 Funds that they intended to
terminate the custody agreement between the Bank and the 1784 Funds. In
connection with the termination of these agreements, the Bank received
termination fees of $11.3 million. Therefore, the net effect of the
additional payment and the termination fees was a decrease in the purchase
price of $6.4 million.
5. DEPOSITS
Time deposits at June 30, 2000 and December 31, 1999 include non-interest
bearing amounts of approximately $65 million at both dates.
All time deposits had a minimum balance of $100,000 and a maturity of less
than six months at June 30, 2000 and December 31, 1999.
6. SHORT-TERM BORROWINGS
The components of short-term borrowings are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(Dollars in thousands)
<S> <C> <C>
Federal Home Loan Bank of Boston advances $200,000 $ -
Federal funds purchased 115,000 -
Treasury, tax and loan account 1,001 1,000
-------- --------
Total $316,001 $ 1,000
======== ========
</TABLE>
The Company has a borrowing arrangement with the Federal Home Loan Bank of
Boston, which is utilized on an overnight and short-term basis to satisfy
temporary funding requirements. The interest rate on the outstanding
balance at June 30, 2000 was 6.44%.
The rate on the outstanding balance of federal funds purchased from other
banks at June 30, 2000 was 7.07%.
10
<PAGE>
6. SHORT-TERM BORROWINGS (CONCLUDED)
The Company receives federal tax deposits from clients as agent for the
Federal Reserve Bank ('FRB') and accumulates these deposits in the
Treasury, tax and loan account. The FRB charges the Company interest at
the Federal funds rate on such deposits. The interest rate on the
outstanding balance at June 30, 2000 was 6.66%.
7. STOCKHOLDERS' EQUITY
As of June 30, 2000, the Company has authorized 1,000,000 shares of
Preferred Stock and 40,000,000 shares of Common Stock, all with a par
value of $0.01 per share.
At the Annual Meeting of Shareholders of the Company held on April 18,
2000, the Shareholders approved an increase in the number of authorized
shares of Common Stock from 20,000,000 to 40,000,000. On May 2, 2000 the
Company filed an amendment to its Certificate of Incorporation increasing
the number of authorized shares of Common Stock to 40,000,000. Such shares
are available for general corporate purposes as determined by the
Company's Board of Directors.
On May 15, 2000, the Board of Directors approved a two-for-one stock split
in the form of a 100% stock dividend to shareholders of record on May 31,
2000. The dividend was paid on June 15, 2000. A total of 14,858,146 shares
of common stock were issued in connection with the stock split. 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 stock
split. The par value of these additional shares was capitalized by a
transfer from retained earnings to common stock. The stock splits did not
cause any change in the $0.01 par value per share of the common stock or
in total stockholders' equity.
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 4,640,000 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. No options were granted to consultants or directors
during the six months ended June 30, 2000 and 1999. Of the 4,640,000
shares of Common Stock authorized for issuance under the plan, 869,826
were available for grant at June 30, 2000.
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 400,000 shares of Common Stock. Options to
purchase 10,000 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.
11
<PAGE>
7. STOCKHOLDERS' EQUITY (CONTINUED)
In November 1995, the Company granted 448,000 shares of Common Stock to
certain officers of the Company under the 1995 Stock Plan. Of these
grants, 420,000 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 40,000 shares of Common Stock to an officer of
Investors Capital Services, Inc.
The Company has recorded deferred compensation of $434,000 and $689,000 at
June 30, 2000 and December 31, 1999 respectively, related to these grants.
Under the terms of the 1997 Employee Stock Purchase Plan, the Company may
issue up to 560,000 shares of Common Stock pursuant to the exercise of
nontransferable options granted to participating employees. The 1997
Employee Stock 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, 1999 2,960,334 $ 13
Granted 203,608 22
Exercised (692,704) 8
Canceled (44,950) 15
--------------
Outstanding at June 30, 2000 2,426,288 $ 15
==============
Outstanding and exercisable at June 30, 2000 1,076,619
==============
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1998 2,811,244 $ 9
Granted 213,010 15
Exercised (566,568) 6
Canceled (24,552) 10
--------------
Outstanding at June 30, 1999 2,433,134 $ 10
==============
Outstanding and exercisable at June 30, 1999 1,215,794
==============
</TABLE>
12
<PAGE>
7. STOCKHOLDERS' EQUITY (CONCLUDED)
A summary of activity under the 1997 Employee Stock Purchase Plan is as
follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE TWELVE
MONTHS ENDED MONTHS ENDED
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
(NUMBER OF SHARES)
<S> <C> <C>
Total shares available under the Plan, beginning of period 357,354 433,604
Issued at June 30 (34,466) (42,494)
Issued at December 31 - (33,756)
======== ========
Total shares available under the Plan, end of period 322,888 357,354
======== ========
</TABLE>
During the six months ended June 30, 2000, the purchase price of the stock
was $21.00 or 90% of the average market value of the Common Stock on the
first business day of the payment period ending June 30, 2000.
During the year ended December 31, 1999, the purchase price of the stock
was $13.75 and $17.50, or 90% of the average market value of the Common
Stock on the first business day of the payment period ending June 30,
1999, and December 31, 1999, respectively.
EARNINGS PER SHARE - Reconciliation from Basic EPS to Diluted EPS for the
periods ended June 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
PER-SHARE
INCOME SHARES AMOUNT
(Dollars in thousands, except share data)
JUNE 30, 2000
BASIC EPS
<S> <C> <C> <C>
Income available to common stockholders $ 15,387 29,578,721 $ 0.52
========
Dilutive effect of common equivalent shares of stock options 1,335,847
----------
DILUTED EPS
Income available to common stockholders $ 15,387 30,914,568 $ 0.50
========== ========== ========
JUNE 30, 1999
BASIC EPS
Income available to common stockholders $ 9,907 28,197,182 $ 0.35
========
Dilutive effect of common equivalent shares of stock options 917,390
----------
DILUTED EPS
Income available to common stockholders $ 9,907 29,114,572 $ 0.34
========== ========== ========
</TABLE>
13
<PAGE>
8. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
LINES OF CREDIT - At June 30, 2000, the Company had commitments to
individuals and mutual funds under collateralized open lines of credit
totaling $240 million, against which $51 million 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, 2000 and 1999 were $650 million and $490 million,
respectively. Interest rate contracts involve an agreement with a
counterparty to exchange cash flows based on an underlying interest rate
index. A swap agreement involves the exchange of a series of interest
payments, either at a fixed or variable rate, based upon the notional
amount without the exchange of the underlying principal amount. The
Company's exposure from these interest rate contracts results from the
possibility that one party may default on its contractual obligation. The
Company has never experienced terminations by counterparties of interest
rate swaps. Credit risk is limited to the positive fair value of the
derivative financial instrument, which is significantly less than the
notional value. During the first six months of 2000, 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 6.02% at
June 30, 2000. Variable-interest payments received are indexed to the
one-month London Interbank Offering Rate and the Overnight Federal Funds
Rate. At June 30, 2000, the weighted-average rate of variable
market-indexed interest payment obligations to the Company was 6.61%. 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 $4.5 million at
June 30, 2000.
9. COMMITMENTS AND CONTINGENCIES
RESTRICTIONS ON CASH BALANCES - The Company is required to maintain
certain average cash reserve balances. The reserve balance requirement
with the FRB as of June 30, 2000 was $17 million. In addition, another
cash balance in the amount of $2 million was pledged to secure clearings
with a depository institution, Depository Trust Company, as of June 30,
2000.
LEASE COMMITMENTS - Minimum future commitments on non-cancelable operating
leases at June 30, 2000 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING BANK PREMISES EQUIPMENT
(Dollars in thousands)
<S> <C> <C>
2000 $ 4,772 $ 1,097
2001 9,449 1,831
2002 8,694 1,257
2003 8,668 380
2004 and beyond 32,764 -
</TABLE>
Total rent expense was $6.8 million and $5.5 million for the six months
ended June 30, 2000 and 1999, respectively.
On September 20, 1995, the Company entered into a five-year service
agreement with Electronic Data Systems ('EDS') expiring on December 31,
2005. Under the terms of the agreement, the Company agreed to pay certain
monthly service fees based on usage. Service expense under this contract
was $1.7 million for both the six months ended June 30, 2000 and 1999.
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, 2000 that
are material to the consolidated financial position or results of
operations of the Company.
14
<PAGE>
10. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material adverse effect on the Company's and the Bank's
results of operations and financial conditions. 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, 2000, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.
15
<PAGE>
10. REGULATORY MATTERS (CONCLUDED)
As of June 30, 2000, 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, 2000
and the year ended December 31, 1999.
<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, 2000:
Total Capital
(to Risk Weighted Assets
- the Company) $149,121 16.37% $ 72,882 8.00% N/A N/A
Total Capital
(to Risk Weighted Assets
-the Bank) $145,716 16.03% $ 72,723 8.00% $ 90,904 10.00%
Tier I Capital
(to Risk Weighted Assets
- the Company) $149,021 16.36% $ 36,441 4.00% N/A N/A
Tier I Capital
(to Risk Weighted Assets
-the Bank) $145,616 16.02% $ 36,362 4.00% $ 54,542 6.00%
Tier I Capital
(to Average Assets
- the Company) $149,021 5.53% $107,773 4.00% N/A N/A
Tier I Capital
(to Average Assets
-the Bank) $145,616 5.41% $107,759 4.00% $134,699 5.00%
AS OF DECEMBER 31, 1999:
Total Capital
(to Risk Weighted Assets
- the Company) $124,861 14.97% $ 66,726 8.00% N/A N/A
Total Capital
(to Risk Weighted Assets
- the Bank) $121,947 14.66% $ 66,567 8.00% $ 83,209 10.00%
Tier I Capital
(to Risk Weighted Assets
- the Company) $124,761 14.96% $ 33,363 4.00% N/A N/A
Tier I Capital
(to Risk Weighted Assets
- the Bank) $121,847 14.64% $ 33,283 4.00% $ 49,925 6.00%
Tier I Capital
(to Average Assets
- the Company) $124,761 5.46% $ 91,382 4.00% N/A N/A
Tier I Capital
(to Average Assets
- the Bank) $121,847 5.34% $ 91,310 4.00% $114,138 5.00%
</TABLE>
Under Massachusetts law, trust companies such as the Bank, like national
banks, may pay dividends no more often than quarterly, and only out of
'net profits' and to the extent that such payments will not impair the
Bank's capital stock and surplus account. Moreover, prior approval of the
Commissioner of Banks and the Commonwealth of Massachusetts is required if
the total dividends for a calendar year would exceed net profits for that
year combined with retained net profits for the previous two years. These
restrictions on the ability of the Bank to pay dividends to the Company
may restrict the ability of the Company to pay dividends to its
stockholders.
16
<PAGE>
11. SEGMENT REPORTING
The Company does not utilize segment information for internal reporting as
management views the Company as one segment. The following represents net
operating revenue by geographic area for the six months ended June 30,
2000 and 1999, and long-lived assets by geographic area as of June 30,
2000 and 1999:
<TABLE>
<CAPTION>
NET OPERATING NET OPERATING LONG-LIVED LONG-LIVED
GEOGRAPHIC REVENUE REVENUE ASSETS ASSETS
INFORMATION: 2000 1999 2000 1999
------------ ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
United States $102,194 $ 76,261 $ 46,720 $ 10,854
Ireland 2,606 2,208 288 372
Canada 1,106 1,233 99 207
Cayman Islands 39 64 - -
======== ======== ======== ========
Total $105,945 $ 79,766 $ 47,107 $ 11,433
======== ======== ======== ========
</TABLE>
The following represents the Company's operating revenue by service line
for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
OPERATING REVENUE OPERATING REVENUE
SERVICE LINES: 2000 1999
--------------------------------------- ------------------ --------------------
(Dollars in thousands)
<S> <C> <C>
Custody, accounting, transfer agency,
and administration $ 62,021 $ 50,832
Cash Management 5,785 6,042
Securities lending 5,392 3,440
Foreign exchange 5,160 2,408
Investment advisory 797 749
================== ====================
Total $ 79,155 $ 63,471
================== ====================
</TABLE>
No one customer accounted for 10% of the Company's consolidated net
operating revenues for the six months ended June 30, 2000 and 1999.
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
subsidiary, Investors Bank & Trust 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 85 mutual fund complexes, investment advisors, banks and insurance
companies. The Company provides financial asset administration services for net
assets that totaled approximately $276 billion at June 30, 2000, including
approximately $18 billion of foreign assets. The Company also engages in private
banking transactions, including secured lending and deposit accounts.
On October 1, 1998, the Bank acquired the domestic institutional trust
and custody business ('the Business') of BankBoston, N.A. Under the terms of the
purchase agreement, the Bank paid approximately $48 million to BankBoston as of
the closing and subsequently paid an additional $4.9 million based upon client
retention and business performance. The Business provides master trust and
custody services to endowments, pension funds, municipalities, mutual funds and
other financial institutions, primarily in New England. The acquisition was
accounted for using the purchase method of accounting. In connection with the
acquisition, the Bank and BankBoston also entered into an outsourcing agreement.
Pursuant to the outsourcing agreement, the Bank acted as custodian and provided
certain other services for three BankBoston asset management related businesses:
domestic private banking, institutional asset management and international
private banking. In September 1999, the Bank received notification of
BankBoston's intent to terminate the outsourcing agreement. The termination,
effective February 2000, had no impact on the remaining business purchased from
BankBoston. Pursuant to the terms of the outsourcing agreement, the Bank
received a termination fee of $7 million. In addition, in May 2000, the Bank
received notification from the BankBoston sponsored 1784 Funds that the 1784
Funds intended to terminate their custody agreement with the Bank. Pursuant to
the terms of the purchase agreement with BankBoston, the Bank received a
termination fee of $4.3 million in connection with termination of the 1784 Funds
custody agreement. Therefore, a net adjustment was made to decrease the purchase
price by $6.4 million, resulting from the above-mentioned items. The Bank does
not anticipate a material impact on net income due to the termination of the
outsourcing agreement or the termination of the 1784 funds custody agreement.
The Bank was informed by BankBoston that its decision to terminate both the
outsourcing and the 1784 Funds custody agreement was not related in any way to
the Company's quality of service but was made as part of the integration process
undertaken in connection with the BankBoston/Fleet merger.
On October 29, 1999, the Bank entered into an agreement with Sanwa Bank
California, pursuant to which the Bank agreed to purchase the right to provide
institutional custody and related services to accounts managed by the Trust
Company of the West. The Bank completed the purchase on March 10, 2000. The
accounts subject to the agreement totaled approximately $4.6 billion in assets
at March 10, 2000.
On March 26, 1999, the Company completed the issuance and sale of
1,800,000 shares of Common Stock at $14.50 per share in a private placement to
one investor. The net capital raised in the private placement was used to
support the Company's balance sheet growth.
On May 15, 2000, the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100% stock dividend payable on or about
June 15, 2000 to stockholders of record on May 31, 2000. All share numbers in
this report have been restated to reflect the two-for-one stock split paid June
15, 2000, where applicable.
18
<PAGE>
REVENUE AND INCOME OVERVIEW
The Company derives its revenues from financial asset administration
services and private banking transactions. Although interest income and
non-interest income are reported separately for financial statement presentation
purposes, the Company's clients view the pricing of the Company's asset
administration and banking service offerings on a bundled basis. In establishing
a fee structure for a specific client, management analyzes all expected revenue
and related expenses, as opposed to separately analyzing fee income and interest
income and related expenses for each from such relationship. Accordingly,
management believes net operating revenue (net interest income plus non-interest
income) and net income are the most meaningful measures of financial results.
Net operating revenue increased 33% to $105.9 million in the first six months of
2000 from $79.8 million in the first six months of 1999.
Non-interest income consists primarily of fees for financial asset
administration and is principally derived from custody, multicurrency
accounting, transfer agency and administration services for financial asset
managers and the assets they control. The Company's clients pay fees based on
the volume of assets under custody, portfolio transactions, income collected and
whether other value-added services such as foreign exchange, securities lending
and performance measurement are needed. Asset-based fees are usually charged on
a sliding scale and are subject to minimum fees. As such, when the assets in a
portfolio under custody grow as a result of changes in market values or cash
inflows, the Company's fees may be a smaller percentage of those assets. Fees
for individually managed accounts, such as custodial, trust and portfolio
accounting services for individuals, investment advisors, private trustees,
financial planners, other banks and fiduciaries, and other institutions are also
included in non-interest income.
Net interest income represents the difference between income generated
from interest-earning assets and expense on interest-bearing liabilities.
Interest-bearing liabilities are generated by the Company's clients who, in the
course of their financial asset management, generate cash balances, which they
deposit on a short-term basis with the Company. The Company invests these cash
balances and remits a portion of the earnings on these investments to its
clients. The Company's share of earnings from these investments is viewed as
part of the total package of compensation paid to the Company from its clients
for performing asset administration services.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the SEC (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 liquidity,
the effect of the termination of the BankBoston outsourcing agreement and the
1784 Funds custody agreement, and the effect of certain pending litigation
against the Company's Dublin subsidiaries. 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 SEC.
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. Also, the outcome of any legal
claims against the Company cannot be predicted with certainty. Defense and
settlement of any claims may be costly and require management's attention. Even
if the Company is successful in defending or settling any claims, the existence
of the claims may harm the Company's reputation or ability to add new clients.
The Company has been experiencing a period of rapid growth, which
places a strain on all of its resources, including management. In addition, the
Company must successfully integrate future acquisitions, if any, into the
Company's business. Also, the Company must continue to attract and retain
skilled personnel in a tight labor market. If the Company fails to manage growth
effectively, integrate acquisitions successfully or attract and retain skilled
employees, it could reduce the quality of the Company's services, lead to loss
of key employees and clients, and have a material adverse effect on the
Company's operations.
19
<PAGE>
The Company relies on certain intellectual property protections to
preserve its intellectual property rights. Any invalidation of the Company's
intellectual property rights or lengthy and expensive defense of those rights
could have a material adverse effect on the Company. 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.
STATEMENT OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Non-interest Income
Non-interest income increased $16 million to $80 million for the six
months ended June 30, 2000 from $64 million for the six months ended June 30,
1999. Non-interest income consists of the following items:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------
2000 1999 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $79,155 $63,471 25 %
Computer service fees 239 246 (3) %
Other operating income 564 268 110 %
------- -------
Total non-interest income $79,958 $63,985 25 %
======= =======
</TABLE>
Asset administration fees increased $15.7 million to $79.2 million for
the six months ended June 30, 2000 compared to $63.5 million for the six months
ended June 30, 1999. The Company earns such fees on assets processed by the
Company on behalf of a variety of financial asset managers. Assets processed is
the total dollar value of financial assets on the reported date for which the
Company provides one or more of the following services: global custody,
multi-currency accounting, institutional transfer agency, performance
measurement, foreign exchange, securities lending, mutual fund administration
and investment advisory services. 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 3% to $276 billion at
June 30, 2000 from $268 billion at June 30, 1999. The change in assets processed
reflects a $49 billion increase in assets processed for new and existing
clients, offset by the loss of $41 billion in assets processed related to the
previously disclosed termination of the outsourcing agreement between the
Company and BankBoston and the custody agreement between the Company and the
BankBoston sponsored 1784 Funds. Of the $49 billion increase, approximately $11
billion reflects assets processed for new clients and $38 billion reflects
growth of assets processed for existing clients. Also contributing to the
increase in asset administration fees was the Company's success in marketing
ancillary services such as foreign exchange and securities lending.
Computer service fees consist of amounts charged by the Company for
data processing services related to client accounts. Other operating income
consists of dividends received relating to the Federal Home Loan Bank of Boston
('FHLBB') stock investment and miscellaneous transaction-oriented private
banking fees. The increase in other operating income resulted from an increase
in FHLBB stock dividend income due to an increase in the Company's average
investment in FHLBB stock during the period ended June 30, 2000, compared to the
period ended June 30, 1999.
20
<PAGE>
Operating Expenses
Total operating expenses increased by $18.3 million to $82.1 million
for the six months ended June 30, 2000 compared to $63.8 million for the six
months ended June 30, 1999. The components of operating expenses were as
follows:
<TABLE>
<CAPTION>
For the Six Months Ended June 30
--------------------------------
2000 1999 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $50,411 $38,853 30%
Technology and telecommunications 10,155 7,426 37
Occupancy 5,107 4,039 26
Transaction processing services 5,013 4,293 17
Depreciation and amortization 2,190 1,850 18
Professional fees 1,566 1,691 (7)
Travel and sales promotion 1,520 1,084 40
Amortization of goodwill 826 887 (7)
Insurance 395 382 3
Other operating expenses 4,913 3,253 51
------- -------
Total Operating Expenses $82,096 $63,758 29%
======= =======
</TABLE>
Compensation and benefits expense increased by $11.6 million or 30%
from period to period due to several factors. The average number of employees
increased 15% to 1,545 during the six months ended June 30, 2000 from 1,341
during the same period in 1999. This increase in number of employees relates to
the increase in client relationships and the expansion of existing client
relationships during the period. In addition, compensation expense related to
the Company's management incentive plans increased $3.3 million between periods
because of the increase in earnings subject to incentive payments in the first
quarter of 2000. Benefits, including payroll taxes, group insurance plans,
retirement plan contributions and tuition reimbursement, increased by $753,000
for the six months ended June 30, 2000 from the same period in 1999.
Technology and telecommunications expense consists of operating lease
payments for microcomputers, fees charged by Electronic Data Systems ('EDS') for
mainframe data processing, telephone expense, software maintenance fees and
licenses, optical imaging and contracting programming fees. Technology and
telecommunications expense increased $2.7 million from period to period. The
Company's use of contract programmers to perform information systems development
projects accounted for $1.3 million of the increase. Increased hardware,
software and telecommunication expenses needed to support the growth in assets
processed accounted for the remainder of the increase.
Occupancy expense increased $1.1 million to $5.1 million for the six
months ended June 30, 2000 from $4 million for the six months ended June 30,
1999. The majority of the increase was rent expense, which resulted from leasing
additional office space in Boston at the current higher rental rates during the
first six months of 2000. Also, additional property taxes were paid due to a
reassessment of existing leased properties.
Transaction processing services consists of volume related expenses
including subcustodian fees and external contract services. The increase of
$720,000 from period to period was primarily due to an increase in subcustodian
and pricing fees driven by the growth in assets processed.
Depreciation and amortization expense increased $340,000 to $2.2
million for the six months ended June 30, 2000 from $1.9 million for the six
months ended June 30, 1999. The increase resulted from capitalized software and
capitalized expenditures associated with the expansion into additional office
space.
Travel and sales promotion expense consists of expenses incurred by the
sales force, client management staff and other employees in connection with
making sales calls on potential clients, traveling to existing client sites and
the Company's foreign subsidiaries, and attending industry conferences. Travel
and sales promotion expense increased $436,000 to $1.5 million from $1.1 million
for the same period in 1999, due primarily to increased travel to foreign
subsidiaries.
21
<PAGE>
Other operating expenses include fees for office supplies, recruiting
costs, temporary help, postage and delivery charges and various fees assessed by
the Massachusetts Banking Commission. These expenses increased $1.7 million to
$4.9 million for the six months ended June 30, 2000 from $3.2 million for the
six months ended June 30, 1999. Recruiting costs and temporary help accounted
for $476,000 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 the amount of interest received on interest
earning assets less the interest paid on interest bearing liabilities. 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, 2000 compared to the same period in 1999. Changes
attributed to both volume and rate have been allocated based on the proportion
of change in each category.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
------------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold and other $ (82) $ 225 $ 143
Investment securities 26,815 6,267 33,082
Loans 1,285 21 1,306
-------- -------- --------
Total interest-earning assets $ 28,018 $ 6,513 $ 34,531
-------- -------- --------
INTEREST-BEARING LIABILITIES
Deposits $ 6,041 $ 588 $ 6,629
Borrowings 14,108 3,588 17,696
-------- -------- --------
Total interest-bearing liabilities $ 20,149 $ 4,176 $ 24,325
-------- -------- --------
Change in net interest income $ 7,869 $ 2,337 $ 10,206
======== ======== ========
</TABLE>
Net interest income increased $10.2 million or 65% to $26 million for
the six months ended June 30, 2000 from $15.8 million for the same period in
1999. The increase was reflective of balance sheet growth over the same period
last year combined with the positive effect of increased client deposits and
improvement in the yield on the investment securities portfolio. The net
interest margin increased 11 basis points from 1.97% to 2.08%.
Average interest-earning assets, primarily investment securities,
increased $900 million or 56% to $2.5 billion compared with the same period in
1999. Funding for the asset growth was provided by an increase in average client
deposits of $305 million or 28% and an increase in average short-term
borrowings, primarily repurchased agreements and FHLBB borrowings of $551
million. The effect on net interest income from changes in volume of
interest-earning assets and interest-bearing liabilities was an increase of
approximately $7.9 million for the six months ended June 30, 2000 compared with
the same period last year.
Average yield on interest-earning assets increased 74 basis points to
6.38% this quarter from 5.64% for the same period last year. The average rate
paid by the Company on interest-bearing liabilities increased 70 basis points
from 4.27% to 4.97%. The increase in rates reflects the current higher interest
rate environment compared with a year ago. The effect on net interest income due
to changes in rates was an increase of approximately $2.3 million period to
period.
Income Taxes
Taxes for the six months ended June 30, 2000 were $7.7 million, up from
$5.3 million a year ago. The effective tax rate for the period was 32%, which
compares to 33% 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.
22
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED JUNE 30, 2000 AND 1999
Non-interest Income
Non-interest income increased $7.4 million to $39.8 million for the
quarter ended June 30, 2000 from $32.4 million for the quarter ended June 30,
1999. Non-interest income consists of the following items:
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
---------------------
2000 1999 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $39,439 $32,091 23 %
Computer service fees 118 123 (4) %
Other operating income 289 138 109 %
------- -------
Total non-interest Income $39,846 $32,352 23 %
======= =======
</TABLE>
Asset administration fees increased $7.3 million to $39.4 million for
the quarter ended June 30, 2000 compared to $32.1 million for the quarter ended
June 30, 1999. 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 3% to $276 billion at June 30, 2000 from
$268 billion at June 30, 1999. The change in assets processed reflects a $49
billion increase in assets processed for new and existing clients, offset by the
loss of $41 billion in assets processed related to the previously disclosed
termination of the outsourcing agreement between the Company and BankBoston and
the custody agreement between the Company and the BankBoston sponsored 1784
Funds. Of the $49 billion increase, approximately $11 billion reflects assets
processed for new clients and $38 billion reflects growth of assets processed
for existing clients. Also contributing to the increase in asset administration
fees was the Company's success in marketing ancillary services such as foreign
exchange and securities lending.
The increase in other operating income resulted from an increase in
FHLBB stock dividend income due to an increase in the Company's average
investment in FHLBB stock during the period ended June 30, 2000, compared to the
period ended June 30, 1999.
Operating Expenses
Total operating expenses increased by $7.5 million to $40.3 million for
the quarter ended June 30, 2000 compared to $32.8 million for the quarter ended
June 30, 1999. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
------------------------------
2000 1999 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $23,884 $19,956 20%
Technology and telecommunications 5,560 3,806 46
Occupancy 3,035 2,078 46
Transaction processing services 2,494 2,113 18
Depreciation and amortization 1,147 971 18
Professional fees 492 1,046 (53)
Travel and sales promotion 851 577 47
Amortization of goodwill 405 443 (9)
Insurance 200 193 4
Other operating expenses 2,254 1,648 37
------- -------
Total Operating Expenses $40,322 $32,831 23%
======= =======
</TABLE>
23
<PAGE>
Compensation and benefits expense increased by $3.9 million or 20% from
period to period due to several factors. The average number of employees
increased 14% to 1,568 during the quarter ended June 30, 2000 from 1,374 during
the same period in 1999. This increase in number of employees relates to the
increase in client relationships and the expansion of existing client
relationships during the period. Benefits, including payroll taxes, group
insurance plans, retirement plan contributions and tuition reimbursement,
increased by $912,000 for the quarter ended June 30, 2000 from the same period
in 1999.
Technology and telecommunications expense increased $1.8 million from
period to period. The Company's use of contract programmers to perform
information systems development projects accounted for $831,000 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 $957,000 to $3 million for the quarter
ended June 30, 2000 from $2.1 million for the quarter ended June 30, 1999. The
increase resulted from leasing additional office space in Boston at the current
higher rental rates and additional property taxes paid due to a reassessment of
existing leased properties.
The increase of $382,000 in transaction processing services from period
to period was primarily due to an increase in subcustodian and pricing fees
driven by the growth in assets processed.
Depreciation and amortization expense increased $175,000 to $1.1
million for the quarter ended June 30, 2000 from $971,000 for the quarter ended
June 30, 1999. The increase related primarily to capitalized software and
capitalized expenditures associated with the expansion into additional office
space.
Professional fees decreased $553,000 to $492,000 for the quarter ended
June 30, 2000 from $1 million for the quarter ended June 30, 1999. The decrease
in professional fees was mainly attributable to consulting services related to
the integration of the BankBoston business and tax planning paid during the same
period in 1999.
Travel and sales promotion expense increased $274,000 to $851,000 for
the quarter ended June 30, 2000 from $577,000 for the same period in 1999 due to
increased travel to foreign subsidiaries.
Other operating expenses increased $606,000 to $2.2 million for the
quarter ended June 30, 1999 from $1.6 million for the quarter ended June 30,
1999. Recruiting costs and temporary help accounted for $298,000 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.
24
<PAGE>
Net Interest Income
Net interest income is the amount of interest received on interest
earning assets less the interest paid on interest bearing liabilities. The
volume and mix of assets and liabilities, and the movement and level of interest
rates affect net interest income. 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, 2000 compared to the same period in 1999. Changes attributed to
both volume and rate have been allocated based on the proportion change in each
category.
<TABLE>
<CAPTION>
Change Change
Due to Due to
Volume Rate Net
------ ---- ---
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold and other $ (486) $ 405 $ (81)
Investment securities 12,600 3,749 16,349
Loans 565 114 679
-------- -------- --------
Total interest-earning assets $ 12,679 $ 4,268 $ 16,947
-------- -------- --------
INTEREST-BEARING LIABILITIES
Deposits $ 2,622 $ 834 $ 3,456
Borrowings 6,371 2,721 9,092
-------- -------- --------
Total interest-bearing liabilities $ 8,993 $ 3,555 $ 12,548
-------- -------- --------
Change in net interest income $ 3,686 $ 713 $ 4,399
======== ======== ========
</TABLE>
Net interest income increased $4.4 million or 51% to $13 million for
the quarter ended June 30, 2000 from $8.6 million for the same period in 1999.
The increase was reflective of balance sheet growth over the same period last
year combined with the positive effect of increased client deposits and
improvement in the yield on the investment securities portfolio.
Average interest-earning assets, primarily investment securities,
increased $825 million or 47% to $2.6 billion compared with the same period in
1999. Funding for the asset growth was provided by an increase in average client
deposits of $306 million or 29% and an increase in average short-term
borrowings, primarily repurchased agreements and FHLBB borrowings of $490
million. The effect on net interest income from changes in volume of
interest-earning assets and interest-bearing liabilities was an increase of
approximately $3.7 million for the quarter ended June 30, 2000 compared with the
same period last year.
Average yield on interest-earning assets increased 81 basis points to
6.48% this quarter from 5.67% for the same period last year. The average rate
paid by the Company on interest-bearing liabilities increased 87 basis points
from 4.31% to 5.18%. The increase in rates reflects the current higher interest
rate environment compared with a year ago. The effect on net interest income due
to changes in rates was an increase of approximately $713,000 period to period.
Income Taxes
Taxes for the quarter ended June 30, 2000 were $4 million, up from $2.5
million a year ago. The effective tax rate for the period was 32%, which
compares to 30% for the same period in the prior year. The period-over-period
increase reflects a year-to-date adjustment recorded in the second quarter of
1999 related to the restructuring of corporate entities for state tax planning
purposes.
25
<PAGE>
FINANCIAL CONDITION
INVESTMENT PORTFOLIO
The following table summarizes the Company's investment portfolio for the dates
indicated:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ ------------------
(Dollars in thousands)
SECURITIES HELD TO MATURITY:
<S> <C> <C>
Mortgage-backed securities $ 1,677,003 $ 1,464,816
Federal agency securities 260,298 227,030
State and political subdivisions 69,154 63,871
Foreign government securities 7,603 7,638
--------------------- --------------------
Total securities held to maturity $ 2,014,058 $ 1,763,355
===================== ====================
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities $ 415,827 $ 239,132
Federal agency securities 52,314 52,310
Corporate debt 46,605 47,875
State and political subdivisions 38,140 36,293
--------------------- --------------------
Total securities available for sale $ 552,886 $ 375,610
===================== ====================
</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 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.
26
<PAGE>
The book value and weighted average yield of the Company's securities
held to maturity at June 30, 2000, by effective maturity, are reflected in the
following table:
<TABLE>
<CAPTION>
Years
---------------------------------------------------------------------------------------
Under 1 1 to 5 5 to 10
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ 15,330 6.01% $847,677 6.60% $567,062 7.04%
Federal agency securities - - 84,198 6.86 176,100 7.17
State and political subdivisions - - - - 2,105 5.04
Foreign government securities - - 7,603 6.84 - -
-------- -------- --------
Total securities held to maturity $ 15,330 6.01% $939,478 6.62% $745,267 7.07%
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Years
------------------------
Over 10
Amount Yield
------ -----
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities $246,934 7.26%
Federal agency securities - -
State and political subdivisions 67,049 5.40
Foreign government securities - -
--------
Total securities held to maturity $313,983 6.86%
=========
</TABLE>
The book value and weighted average yield of the Company's securities
available for sale at June 30, 2000 by effective maturity, are reflected in the
following table:
<TABLE>
<CAPTION>
Years
-----------------------------------------------------------------------------------------
Under 1 1 to 5 5 to 10
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ - - $403,288 6.81% $ 12,539 6.68%
Federal agency securities - - 52,314 5.96 - -
Corporate debt - - - - - -
State and political subdivisions 3,362 4.13% 22,615 4.29 11,656 4.50
---------- -------- --------
Total securities available
for $ 3,362 4.13% $478,217 6.60% $ 24,195 5.63%
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Years
------------------------
Over 10
Amount Yield
------ -----
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities $ - -
Federal agency securities - -
Corporate debt 46,605 5.60%
State and political subdivisions 507 6.07
-------
Total securities available
for $ 47,112 5.61%
========
</TABLE>
LOAN PORTFOLIO
The following table summarizes the Company's loan portfolio for the
dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(Dollars in thousands)
<S> <C> <C>
Loans to individuals $ 33,786 $ 65,010
Loans to not-for-profit organizations 13 13
Loans to mutual funds 79,205 44,369
-------- ------------
113,004 109,392
Less: allowance for loan losses (100) (100)
-------- ------------
Net loans $112,904 $ 109,292
======== ============
Floating Rate $112,891 $ 109,279
Fixed Rate 13 13
-------- ------------
$112,904 $ 109,292
======== ============
</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.
27
<PAGE>
At June 30, 2000, the Company's only lending concentrations which
exceeded 10% of total loans were the revolving lines of credit to mutual fund
clients discussed above. These loans were made in the ordinary course of
business on the same terms and conditions prevailing at the time for comparable
transactions.
The Company's credit loss experience has been excellent. There have
been no loan charge-offs 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. 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,
2000. 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.
MARKET RISK: OVERVIEW
The active management of market risk is integral to the Company's
operations. 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
Board approved guidelines.
The Company administers and oversees the investment risk management
process primarily through two oversight bodies: The Board of Directors and the
Asset and Liability Committee ('ALCO'). The Company's Board of Directors
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. ALCO is a senior management committee consisting of the Chief
Executive Officer, the Chief Financial Officer, the Executive Vice President and
members of the Treasury function and others who are responsible for the
day-to-day management of market risk. ALCO meets on a bi-weekly basis to provide
detailed oversight of investment risk, including market risk.
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.
The Company has investment guidelines that define the overall framework for
managing market and other investment risks, including accountabilities and
controls over these activities. In addition, the Company also has specific
investment policies that delineate investment limits and strategies that are
appropriate, given liquidity, surplus and regulatory requirements.
In the normal course of business, the financial position of the Company
is routinely subjected 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 has established that it 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 rates 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 rate risk. Interest rate swap
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, 2000 and June
30, 1999, indicated that an upward shift of interest rates by 200 basis points
would result in a reduction in projected net interest income of 6.41% and 8.37%,
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
6.10% and 6.71%, respectively.
28
<PAGE>
Certain shortcomings are inherent in the methodology used in the above
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, such
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 will differ from actual results. The results of this modeling are monitored
by management and presented to the Board of Directors, quarterly.
MARKET RISK: RE-PRICING RISK
The Company, like all financial intermediaries, is subject to several
types of 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. Re-pricing 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 interest earning assets and the
amount of interest bearing liabilities that could experience changes in 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 contracts. Interest rate contracts are used to hedge
against large rate swings and changes in the shape of the yield curve. The
Company uses interest rate swap contracts to hedge against rising interest rates
and changes in the shape of the yield curve. The Company's current strategy is
to use such contracts to offset increases in interest expense related to
customer deposits and other client funding sources including repurchase
agreements.
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.
29
<PAGE>
The following table presents the repricing schedule for the Company's interest
earning assets and interest bearing liabilities at June 30, 2000:
<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 $ - $ - $ - $ - $ - $ -
Investment securities (2) 1,309,514 278,163 334,645 371,250 273,372 2,566,944
Loans - fixed rate 112,891 - - - - 13
Loans - variable rate - - - 13 - 112,891
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning
assets $ 1,422,405 $ 278,163 $ 334,645 $ 371,263 $ 273,372 $ 2,679,848
Interest-bearing liabilities:
Demand deposit accounts $ 5,512 $ - $ - $ - $ - $ 5,512
Savings accounts 1,085,986 - - - - 1,085,986
Time deposit accounts 24,688 - - - - 24,688
Interest rate contracts (590,000) 60,000 120,000 410,000 - -
Short term borrowings 1,127,855 50,000 - - - 1,177,855
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities $ 1,654,041 $ 110,000 $ 120,000 $ 410,000 $ - $ 2,294,041
----------- ----------- ----------- ----------- ----------- -----------
Net interest sensitivity
gap during the period $ (231,636) $ 168,163 $ 214,645 $ (38,737) $ 273,372 $ 385,807
=========== =========== =========== =========== =========== ===========
Cumulative gap $ (231,636) $ (63,473) $ 151,172 $ 112,435 $ 385,807
=========== =========== =========== =========== ===========
Interest sensitive assets as a
percent of interest sensitive
liabilities (cumulative) 86.00% 96.40% 108.02% 104.90% 116.82%
=========== =========== =========== =========== ===========
Interest sensitive assets as a
percent of total assets
(cumulative) 50.59% 60.48% 72.38% 85.59% 95.31%
=========== =========== =========== =========== ===========
Net interest sensitivity gap as a
percent of total assets (8.24)% 5.98% 7.63% (1.38)% 9.72%
=========== =========== =========== =========== ===========
Cumulative gap as a percent
of total assets (8.24)% (2.26)% 5.38% 4.00% 13.72%
=========== =========== =========== =========== ===========
</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.
30
<PAGE>
MARKET RISK: BASIS RISK
The Company is also exposed to basis risk from interest rate movements
which arise when variable rate assets and liabilities are tied to different
market indices. The Company holds investment securities that are indexed to U.S.
Treasury, LIBOR and to the Prime rate, while its liabilities are primarily
indexed to the Federal Funds overnight rate. The Company continually analyzes
and modifies its simulation assumptions to incorporate projections of all
relevant rate indices.
MARKET RISK: 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 January 1997
sale of 9.77% Capital Securities (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 $0.06 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 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 $0.06 per share of outstanding Common
Stock (approximately $1.8 million based upon 29,759,258 shares outstanding as of
June 30, 2000).
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, 2000 was $525 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,
2000 was $2 billion.
The Company also has a borrowing arrangement with the FHLBB whereby the Company
may borrow amounts determined by prescribed collateral levels and the amount of
FHLBB stock held by the Company. The minimum amount of FHLBB stock required to
be held by the Company is (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, 2000 was
$822 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 $48 million
for the six months ended June 30, 2000. Net cash used for investing activities,
consisting primarily of the excess of purchases of investment securities over
proceeds from maturities of investment securities and decrease in federal funds
sold was $288 million for the six months ended June 30, 2000. Net cash provided
by financing activities, consisting primarily of net activity in deposits, was
$215 million for the six months ended June 30, 2000.
31
<PAGE>
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 $4.1 million and $2.4 million for the six months ended June
30, 2000 and 1999, respectively.
Stockholders' equity at June 30, 2000 was $156 million, an increase of
$19.2 million or 14%, from $136.8 million at December 31, 1999. The ratio of
stockholders' equity to assets increased to 5.55% at June 30, 2000 from 5.36% at
December 31, 1999.
The FRB 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.
FRB and FDIC guidelines require that banking organizations have a
minimum ratio of total capital to risk-adjusted assets and off balance sheet
items of 8.0%. Total capital is defined as the sum of 'Tier I' and 'Tier II'
capital elements, with at least half of the total capital required to be Tier I.
Tier I capital includes, with certain restrictions, the sum of common
stockholders' equity, non-cumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock, and minority interests in consolidated
subsidiaries, less certain intangible assets. Tier II capital includes, with
certain limitations, subordinated debt meeting certain requirements,
intermediate-term preferred stock, certain hybrid capital instruments, certain
forms of perpetual preferred stock, as well as maturing capital instruments and
general allowances for loan losses.
The following table summarizes the Company's Tier I and total capital
ratios at June 30, 2000:
<TABLE>
<CAPTION>
Amount Ratio
-------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 149,021 16.36%
Tier I capital minimum requirement 36,441 4.00%
-------------- ---------------
Excess Tier I capital $ 112,580 12.36%
============= ===============
Total capital $ 149,121 16.37%
Total capital minimum requirement 72,882 8.00%
-------------- ---------------
Excess Total capital $ 76,239 8.37%
============= ===============
Risk adjusted assets, net of intangible assets $ 911,023
=============
</TABLE>
32
<PAGE>
The following table summarizes the Bank's Tier I and total capital
ratios at June 30, 2000:
<TABLE>
<CAPTION>
Amount Ratio
-------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 145,616 16.02%
Tier I capital minimum requirement 36,362 4.00%
-------------- ---------------
Excess Tier I capital $ 109,254 12.02%
============= ===============
Total capital $ 145,716 16.03%
Total capital minimum requirement 72,723 8.00%
-------------- ---------------
Excess Total capital $ 72,993 8.03%
============= ===============
Risk adjusted assets, net of intangible assets $ 909,041
=============
</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, 2000 was 5.53%, which is in excess of
regulatory requirements. The Bank's Leverage Ratio at June 30, 2000 was 5.41%,
which is in excess of regulatory requirements.
33
<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, 2000 Six Months Ended June 30, 1999
----------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------- ------------ ----------- ----------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Federal funds sold and securities
purchased under resale
agreements $ 43,451 $ 1,262 5.81% $ 47,494 $ 1,119 4.71%
Investment securities(1) 2,333,914 75,687 6.49% 1,488,259 42,605 5.73%
Loans(2) 124,662 2,812 4.51% 67,713 1,506 4.45%
----------- ----------- --------- ----------- ----------- ------
Total interest earning assets 2,502,027 $ 79,761 6.38% 1,603,466 $ 45,230 5.64%
----------- --------- ----------- ------
Allowance for loan losses (100) (100)
Non-interest-earning assets 142,507 130,050
----------- -----------
Total assets $ 2,644,434 $ 1,733,416
=========== ===========
INTEREST BEARING LIABILITIES
Deposits:
Demand $ 5,139 $ 51 1.98% $ 59,589 $ 1,348 4.52%
Savings 1,085,859 24,936 4.59% 807,269 17,314 4.29%
Time 12,433 369 5.94% 2,766 65 4.70%
Short term borrowings 1,061,037 28,418 5.36% 510,257 10,722 4.20%
----------- ----------- ------ ----------- ----------- ------
Total interest bearing liabilities 2,164,468 $ 53,774 4.97% 1,379,881 $ 29,449 4.27%
----------- ------ ----------- ------
Non-interest bearing liabilities
Demand deposits 175,365 97,759
Savings 37,017 42,953
Non-interest bearing time
deposits 65,000 65,000
Other liabilities 31,374 16,473
----------- -----------
Total liabilities 2,473,224 1,602,066
Trust preferred stock 24,224 24,195
Equity 146,986 107,155
----------- -----------
Total liabilities and equity $ 2,644,434 $1,733,416
=========== ===========
Net interest income $ 25,987 $ 15,781
=========== ===========
Net interest margin(3) 2.08% 1.97%
====== ======
Average interest rate spread(4) 1.41% 1.37%
====== ======
Ratio of interest-earning assets to
Interest-bearing liabilities 115.60% 116.20%
======== ======
</TABLE>
1) Average yield on available for sale securities is based on amortized cost.
2) Average yield on demand loans includes accrual and non-accrual loan balances.
3) Net interest income divided by total interest-earning assets.
4) Yield on interest-earning assets less rate paid on interest-bearing
liabilities.
34
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this item is contained in the "Market Risk"
section in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as part of this report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2000, two of the Company's Dublin subsidiaries, Investors Trust
& Custodial Services (Ireland) Ltd. ("ITC") and Investors Fund Services
(Ireland) Ltd. ("IFS"), received a plenary summons in the High Court,
Dublin, Ireland, naming ITC and IFS as defendants in an action brought
by the FTF ForexConcept Fund Plc (the "Fund"), a former client of ITC
and IFS. The summons also named as defendants FTF Forex Trading and
Finance, S.A., the Fund's investment manager, Ernst & Young, the Fund's
auditors, and Dresdner Bank - Kleinworth Benson (Suisse) S.A., a
counterparty to the Fund. The Fund is an investment vehicle organized
in Dublin to invest in foreign exchange contracts. A total of
approximately $4.7 million had been invested in the Fund, most of which
was lost prior to the Fund's closing to subscriptions in June 1999.
The summons states only that the Fund's claim is for unspecified
damages arising from breach of contract, misrepresentation and breach
of warranty, negligence and breach of duty of care, and breach of
fiduciary duty, among others. The Fund's claims have not yet been set
forth in detail in any court filing delivered to ITC or IFS. The
Company is investigating this matter, has notified its insurers and
intends to defend itself vigorously. While, as stated above, the Fund's
claims have not been set forth in detail, based on the Company's
investigation through July 15, 2000, management of the Company does not
expect this matter to have a material adverse effect on the results of
operations and financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Annual Meeting of Stockholders (the "Annual Meeting") was held on
April 18, 2000.
b. Not applicable.
c. A vote was proposed to (1) elect Frank B. Condon, Jr. and Robert B.
Fraser, current directors of the Company, as Class II Directors of the
Company to serve for a three year term; (2) approve an amendment to the
Company's Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock from 20 million shares
to 40 million shares; (3) approve an amendment to the company's
Certificate of Incorporation to decrease the number of affirmative
votes necessary to increase the number of authorized shares of the
Company's Common Stock from 75% of shares eligible to vote to a
majority of shares eligible to vote; and (4) ratify the selection of
Deloitte & Touche LLP as independent accountants for the Company for
the fiscal year ending December 31, 2000.
35
<PAGE>
The voting results are as follows:
<TABLE>
<CAPTION>
VOTES AGAINST VOTES BROKER NON-
MATTER VOTES FOR WITHHELD ABSTAINED VOTES
<S> <C> <C> <C> <C> <C>
(1) Frank B. Condon, Jr. 24,214,492 N/A 774,640 N/A -
Robert B. Fraser 24,214,318 N/A 778,814 N/A -
(2) Amendment to charter to -
increase authorized
shares 22,893,128 2,056,730 N/A 39,274
(3) Amendment to charter to
decrease votes required
to increase authorized
shares 22,784,242 228,504 N/A 1,976,386
(3) Deloitte & Touche 24,937,742 18,000 N/A 33,390 -
</TABLE>
d. Not applicable.
ITEM 5. OTHER INFORMATION
On May 15, 2000, the Board of Directors of Investors Financial Services
Corp. (the "Corporation") declared a two-for-one stock split in the form of a
100% stock dividend (the "Stock Split") which was paid on June 15, 2000 to the
Corporation's stockholders of record on May 31, 2000. As a result of the Stock
Split, on June 15, 2000 the total number of outstanding shares of the
Corporation's common stock increased by 100 percent.
As a result of the Stock Split, the number of shares of the
Corporation's common stock registered with the Securities and Exchange
Commission on the Corporation's registration statement on Form S-3 (File No.
333-76885) was increased from 900,000 shares to 1,800,000 shares, all of which
are being offered by Hazelnut Partners, L.P.
Also as a result of the Stock Split, the number of shares of the
Corporation's common stock registered with the Securities and Exchange
Commission on the Corporation's registration statement on (i) Form S-8 (File No.
333-3440) was increased from 1,200,000 shares to 2,400,000 shares, of which
2,240,000 shares are being offered pursuant to the Corporation's Amended and
Restated 1995 Stock Plan and 160,000 shares are being offered pursuant to the
Corporation's 1995 Non-Employee Director Stock Option Plan; (ii) Form S-8 (File
No. 333-43353) was increased from 400,000 shares to 800,000 shares, of which
240,000 shares are being offered pursuant to the Corporation's 1995 Non-Employee
Director Stock Option Plan and 560,000 shares are being offered pursuant to the
Corporation's 1997 Employee Stock Purchase Plan; and (iii) Form S-8 (File No.
333-79639) was increased from 1,200,000 shares to 2,400,000 shares, all of which
are being offered pursuant to the Corporation's Amended and Restated 1995 Stock
Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit 27a. Financial Data Schedule (Period ending June 30,
2000)
Exhibit 27b. Restated Financial Data Schedule (Period ending
June 30, 1999)
(B) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during
the quarter ended June 30, 2000.
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 14, 2000 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
