<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 March 31, 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 April 28, 2000 there were 14,828,902 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
March 31, 2000 (unaudited) and December 31, 1999 (audited) 3
Condensed Consolidated Statements of Income and Comprehensive
Income (unaudited)
Three months ended March 31, 2000 and 1999 4
Condensed Consolidated Statement of Stockholder's Equity (unaudited)
Three months ended March 31, 2000 5
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 15
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 29
PART II OTHER INFORMATION 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES 30
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,635 $ 37,624
Federal funds sold and securities purchased under resale agreements 50,000 150,000
Securities held to maturity (approximate fair value of $1,884,623 and
$1,730,745 at March 31, 2000 and December 31, 1999, respectively) 1,922,050 1,763,355
Securities available for sale 425,111 375,610
Non-marketable equity securities 15,000 15,000
Loans, less allowance for loan losses of $100 at March 31, 2000 and
December 31, 1999 98,526 109,292
Accrued interest and fees receivable 42,057 40,332
Equipment and leasehold improvements, less accumulated depreciation of $8,631 and
$8,615 at March 31, 2000 and December 31, 1999, respectively 10,455 10,337
Goodwill, net 39,611 39,776
Other assets 13,982 11,754
------------- ------------
TOTAL ASSETS $ 2,639,427 $ 2,553,080
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 196,724 $ 240,303
Savings 1,105,843 1,237,104
Time 75,000 75,000
------------- ------------
Total deposits 1,377,567 1,552,407
Securities sold under repurchase agreements 672,517 819,034
Short-term borrowings 379,339 1,000
Other liabilities 39,261 19,583
------------- ------------
Total liabilities 2,468,684 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 24,225 24,218
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and
outstanding: 0 at March 31, 2000 and December 31, 1999) - -
Common stock, par value $0.01 (shares authorized: 20,000,000; issued and
outstanding: 14,785,763 at March 31, 2000 and 14,610,154 at December 31, 148 146
1999)
Surplus 89,149 87,320
Deferred compensation (561) (689)
Retained earnings 60,365 53,542
Accumulated other comprehensive loss, net (2,583) (3,481)
Treasury stock, par value $0.01 (10,814 shares at March 31, 2000 and
December 31, 1999) - -
------------- ------------
Total stockholders' equity 146,518 136,838
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,639,427 $ 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)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements $ 898 $ 673
Investment securities held to maturity and available for sale 35,480 18,748
Loans 1,416 789
------------- ------------
Total interest income 37,794 20,210
Interest expense:
Deposits 12,510 9,337
Short-term borrowings 12,327 3,723
------------- ------------
Total interest expense 24,837 13,060
------------- ------------
Net interest income 12,957 7,150
Non-interest income:
Asset administration fees 39,716 31,380
Computer service fees 121 123
Other operating income 275 130
------------- ------------
Net operating revenue 53,069 38,783
OPERATING EXPENSES:
Compensation and benefits 26,527 18,897
Technology and telecommunications 4,595 3,620
Transaction processing services 2,519 2,180
Occupancy 2,072 1,961
Professional fees 1,074 645
Depreciation and amortization 1,043 879
Travel and sales promotion 669 507
Amortization of goodwill 421 444
Insurance 195 189
Other operating expenses 2,659 1,605
------------- ------------
Total operating expenses 41,774 30,927
------------- ------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 11,295 7,856
Provision for income taxes 3,632 2,828
Minority interest expense, net of income taxes 397 391
------------- ------------
NET INCOME 7,266 4,637
------------- ------------
Other comprehensive income, net of tax of $423 and $425 respectively:
Unrealized gain on securities:
Unrealized holding gains arising during the period 898 756
------------- ------------
Other comprehensive income 898 756
------------- ------------
COMPREHENSIVE INCOME $ 8,164 $ 5,393
============= ============
BASIC EARNINGS PER SHARE $ 0.49 $ 0.34
============= ============
DILUTED EARNINGS PER SHARE $ 0.48 $ 0.33
============= ============
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 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 compensation - - - - 128
Exercise of stock options 175,609 - 2 300 -
Tax benefit from exercise
of options - - - 1,529 -
Net income - - - - -
Cash dividend, $0.03 per share - - - - -
Change in accumulated
other comprehensive
income/(loss), net - - - - -
-------------- ------------ ------------ ----------- -------------
BALANCE, MARCH 31, 2000 14,785,763 10,814 $ 148 $ 89,149 $ (561)
============== ============ ============ =========== =============
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE TREASURY
EARNINGS LOSS STOCK TOTAL
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 $ 53,542 $ (3,481) $ - $ 136,838
Amortization of
deferred compensation - - - 128
Exercise of stock options - - - 302
Tax benefit from exercise
of options - - - 1,529
Net income 7,266 - - 7,266
Cash dividend, $0.03 per share (443) - - (443)
Change in accumulated
other comprehensive
income/(loss), net - 898 - 898
-------------- ---------------- ------------ -------------
BALANCE, MARCH 31, 2000 $ 60,365 $ (2,583) $ - $ 146,518
============== ================ ============ =============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,266 $ 4,637
------------- -------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,464 1,323
Amortization of deferred compensation 128 128
Amortization of premiums on securities, net of accretion of discounts 911 1,783
Changes in assets and liabilities:
Accrued interest and fees receivable (1,725) (3,834)
Other assets (1,378) (2,567)
Other liabilities 19,678 4,087
------------- -------------
Total adjustments 19,078 920
------------- -------------
Net cash provided by operating activities 26,344 5,557
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 12,844 30,041
Proceeds from maturities of securities held to maturity 45,642 103,028
Purchases of securities available for sale (61,392) (57,512)
Purchases of securities held to maturity (204,880) (231,605)
Net decrease/(increase) in federal funds sold and securities
purchased under resale agreements 100,000 (70,000)
Net decrease/(increase) in loans 10,766 (10,940)
Purchases of equipment and leasehold improvements (1,154) (775)
------------- -------------
Net cash used for investing activities (98,174) (237,763)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease)/increase in demand deposits (43,579) 40,260
Net (decrease)/increase in time and savings deposits (131,261) 91,257
Net increase in short-term borrowings 231,822 82,153
Proceeds from exercise of stock options 302 142
Proceeds from issuance of common stock - 26,100
Cash dividends to shareholders (443) (270)
------------- -------------
Net cash provided by financing activities 56,841 239,642
------------- -------------
NET (DECREASE) / INCREASE IN CASH AND DUE FROM BANKS (14,989) 7,436
------------- -------------
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 37,624 18,775
------------- -------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 22,635 $ 26,211
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 23,332 $ 12,603
============= =============
Cash paid for income taxes $ 2,585 $ 1,410
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 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
subsidiaries, Investors Bank & Trust Company (the `Bank') and Investors
Capital Services, Inc. IFSC provides global custody, multicurrency
accounting, institutional transfer agency, performance measurement,
foreign exchange, securities lending, mutual fund administration and
investment advisory services to a variety of financial asset managers,
including mutual fund complexes, investment advisors, banks and insurance
companies. IFSC and the Bank are subject to regulation by the Federal
Reserve Board of Governors, the Office of the Commissioner of Banks of the
Commonwealth of Massachusetts and the Federal Deposit Insurance
Corporation.
As used herein, the defined term `the Company' shall mean IFSC together
with Investors Capital Services, Inc. and the Bank and its domestic and
foreign subsidiaries.
On March 26, 1999, the Company completed the issuance and sale of 900,000
shares of Common Stock at $29 per share in a private placement to one
investor. The net capital raised in the private placement was used to
support the Company's balance sheet growth.
2. INTERIM FINANCIAL STATEMENTS
The condensed consolidated interim financial statements of the Company as
of March 31, 2000 and 1999 and for the three-month periods ended March 31,
2000 and 1999 have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission
(`SEC'). 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.
7
<PAGE>
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. There were no
impaired or non-performing loans at March 31, 2000 or December 31, 1999.
In addition, there have been no loan charge-offs or recoveries during the
three months ended March 31, 2000 and 1999. Loans are summarized as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(Dollars in thousands)
<S> <C> <C>
Loans to individuals $ 42,998 $ 65,010
Loans to not-for-profit institutions 13 13
Loans to mutual funds 55,615 44,369
----------- ----------
98,626 109,392
Less allowance for loan losses 100 100
----------- ----------
Total $ 98,526 $ 109,292
=========== ==========
</TABLE>
The Company had commitments to lend of approximately $186 million and $160
million at March 31, 2000 and December 31, 1999, respectively. The terms
of these commitments are similar to the terms of outstanding loans.
4. GOODWILL
Goodwill related to the Company's acquisition of BankBoston's Domestic
Institutional Trust and Custody Business (the "Business") pursuant to a
purchase and sale agreement dated July 17, 1998 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE TWELVE
MONTHS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31,
2000 1999
(Dollars in thousands)
<S> <C> <C>
Goodwill, beginning of period $ 39,776 $ 43,860
Purchase price adjustment 256 (2,328)
Less amortization for period (421) (1,756)
----------- -----------
Goodwill, end of period $ 39,611 $ 39,776
=========== ===========
</TABLE>
Under the terms of the purchase agreement with BankBoston, N.A., the Bank
paid approximately $48 million 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 the outsourcing
agreement, under which the Bank provided custody services to certain
BankBoston asset management related businesses. Pursuant to the terms of
the outsourcing agreement, the Bank received a termination fee of $7
million. Therefore, the net effect of the additional payment and the
termination fee was a decrease in the purchase price of $2.1 million which
was recorded in the fourth quarter of 1999.
5. DEPOSITS
Time deposits at March 31, 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 three months at March 31, 2000 and December 31, 1999.
8
<PAGE>
6. SHORT-TERM BORROWINGS
The components of short-term borrowings are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(Dollars in thousands)
<S> <C> <C>
Federal Home Loan Bank of Boston advances $ 299,000 $ -
Federal funds purchased 80,000 -
Treasury, tax and loan account 339 1,000
---------- ----------
Total $ 379,339 $ 1,000
========== ==========
</TABLE>
The Company has a borrowing arrangement with the Federal Home Loan Bank of
Boston (`FHLBB'), which is utilized on an overnight basis to satisfy
temporary funding requirements. The interest rate on the outstanding
balance at March 31, 2000 was 6.27%.
The rate on the outstanding balance of federal funds purchased from other
banks at March 31, 2000 was 6.42%.
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 March 31, 2000 was 5.56%.
7. STOCKHOLDERS' EQUITY
As of March 31, 2000, the Company has authorized 1,000,000 shares of
Preferred Stock and 20,000,000 shares of Common Stock, all with a par
value of $0.01 per share.
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 February 16, 1999, the Board of Directors approved a two-for-one stock
split in the form of a 100% stock dividend to shareholders of record on
March 1, 1999. The dividend was paid on March 17, 1999. A total of
6,797,973 shares of common stock were issued in connection with the split.
The par value of these additional shares was capitalized by a transfer
from retained earnings to common stock. The stock split did not cause any
change in the $0.01 par value per share of the common stock or in total
stockholders' equity.
The Company has three stock option plans: the Amended and Restated 1995
Stock Plan, the Amended and Restated 1995 Non-Employee Director Stock
Option Plan, and the 1997 Employee Stock Purchase Plan.
Under the terms of the Amended and Restated 1995 Stock Plan, the Company
may grant options to purchase up to a maximum of 2,320,000 shares of
Common Stock to certain employees, consultants, directors and officers.
The options may be awarded as incentive stock options (employees only),
non-qualified stock options, stock awards or opportunities to make direct
purchases of stock. No options were granted to consultants during the
quarter ended March 31, 2000. Of the 2,320,000 shares of Common Stock
authorized for issuance under the plan, 425,688 were available for grant
at March 31, 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 200,000 shares of Common Stock. Options to
purchase 5,000 shares of Common Stock were awarded on November 8, 1995 to
each director. Any director elected or appointed after such date will
receive an automatic initial grant of options to purchase 2,500 shares
upon becoming a director. Thereafter, each director will receive an
automatic grant of options to purchase 2,500 shares effective upon each
one-year anniversary of the date of such director's original grant.
Additionally, non-employee directors may elect to receive options to
acquire shares of the Company's Common Stock in lieu of such director's
cash retainer. Any election is subject to certain restrictions under the
Amended and Restated 1995 Non-Employee Director Stock Option Plan. The
number of shares of stock underlying the option is equal to the quotient
obtained by dividing the cash retainer by the value of an option on the
date of grant as determined using the Black-Scholes model.
9
<PAGE>
7. STOCKHOLDERS' EQUITY (CONTINUED)
The exercise price of options under the Amended and Restated 1995
Non-Employee Director Stock Option Plan and the incentive stock options
under the Amended and Restated 1995 Stock Plan may not be less than the
fair market value at the date of the grant. The exercise price of the
non-qualified options from the Amended and Restated 1995 Stock Plan is
determined by the compensation committee of the Board of Directors. All
options become exercisable as specified by the Compensation Committee at
the date of the grant.
In November 1995, the Company granted 224,000 shares of Common Stock to
certain officers of the Company under the Amended and Restated 1995 Stock
Plan. Of these grants, 210,000 shares vest in sixty equal monthly
installments, and the remainder vests in five equal annual installments.
Upon termination of employment, the Company has the right to repurchase
all unvested shares at a price equal to the fair market value at the date
of the grant. On March 31, 1998, the Company repurchased 4,000 unvested
shares for $77,000 under the terms of the Amended and Restated 1995 Stock
Plan. On May 29, 1998, the Company granted 20,000 shares of Common Stock
to an officer of Investors Capital Services, Inc. The Company has recorded
deferred compensation of $561,000 and $689,000 at March 31, 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 280,000 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 Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1999 1,480,167 $ 25
Granted 101,392 42
Exercised (268,241) 44
Canceled (16,250) 30
-------------
Outstanding at March 31, 2000 1,297,068 $ 21
=============
Outstanding and exercisable at March 31, 2000 547,294
=============
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1998 1,405,622 $ 21
Granted 98,876 30
Exercised (236,682) 30
Canceled (8,876) 20
-------------
Outstanding at March 31, 1999 1,258,940 $ 31
=============
Outstanding and exercisable at March 31, 1999 415,022
=============
</TABLE>
10
<PAGE>
7. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of activity under the 1997 Employee Stock Purchase Plan is as
follows:
<TABLE>
<CAPTION>
2000 1999
--------------- --------------
SHARES SHARES
--------------- --------------
<S> <C> <C>
Total shares available under the Plan, beginning of period 178,677 216,802
Issued at June 30 - (21,247)
Issued at December 31 - (16,878)
=============== ==============
Total shares available under the Plan, end of period 178,677 178,677
=============== ==============
</TABLE>
During the year ended December 31, 1999, the exercise price of the stock
was $27.50 and $35.00 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 March 31, 2000 and 1999 follows:
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
MARCH 31, 2000
BASIC EPS
Income available to common stockholders $ 7,266 14,742,696 $ 0.49
===========
Dilutive effect of common equivalent shares of stock options 495,531
---------------
DILUTED EPS
Income available to common stockholders $ 7,266 15,238,227 $ 0.48
=========== =============== ===========
MARCH 31, 1999
BASIC EPS
Income available to common stockholders $ 4,637 13,582,568 $ 0.34
===========
Dilutive effect of common equivalent shares of stock options 489,248
---------------
DILUTED EPS
Income available to common stockholders $ 4,637 14,071,816 $ 0.33
=========== =============== ===========
</TABLE>
8. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
LINES OF CREDIT - At March 31, 2000, the Company had commitments to
individuals and mutual funds under collateralized open lines of credit
totaling $243 million, against which $58 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 March 31, 2000 and 1999 were $580 million and $460 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 quarter 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 rate was 5.76% at March 31,
2000. Variable-interest payments received are indexed to the one-month
London Interbank Offering Rate (`LIBOR') and the overnight Federal Funds
rate. At March 31, 2000, the weighted-average rate of variable
market-indexed interest payment obligations to the Company was 6.01%. 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 $5.4 million at
March 31, 2000.
11
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
RESTRICTIONS ON CASH BALANCES - The Company is required to maintain
certain average cash reserve balances. The reserve balance requirement
with the FRB as of March 31, 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 March 31,
2000.
LEASE COMMITMENTS - Minimum future commitments on non-cancelable operating
leases at March 31, 2000 were as follows:
FISCAL YEAR ENDING
<TABLE>
<CAPTION>
BANK PREMISES EQUIPMENT
(Dollars in thousands)
<S> <C> <C> <C>
2000 $ 7,164 $ 986
2001 9,456 731
2002 8,694 171
2003 8,668 3
2004 and beyond 32,764 -
</TABLE>
Total rent expense was approximately $2.9 million and $2.7 million for the
three months ended March 31, 2000 and 1999, respectively.
On February 1, 1996, the Company entered into a five-year facility
management agreement with a third party provider of duplicating and
delivery services. Under the terms of the agreement, the Company agreed to
pay certain minimum annual charges, subject to increases due to certain
usage thresholds. Service expense under this contract was $174,000 and
$153,000 for the three months ended March 31, 2000 and 1999, respectively.
CONTINGENCIES - The Company provides global custody, multicurrency
accounting, institutional transfer agency, performance measurement,
foreign exchange, securities lending, mutual fund administration and
investment advisory services to a variety of financial asset managers,
including mutual fund complexes, investment advisors, banks and insurance
companies. Assets under custody and management, held by the Company in a
fiduciary capacity, are not included in the consolidated balance sheets
since such items are not assets of the Company. Management conducts
regular reviews of its fiduciary responsibilities and considers the
results in preparing its consolidated financial statements. In the opinion
of management, there are no contingent liabilities at March 31, 2000 that
are material to the consolidated financial position or results of
operations of the Company.
10. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material adverse effect on the Company's and the Bank's
results of operations and financial condition. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's
and the Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of March 31, 2000, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.
12
<PAGE>
10. REGULATORY MATTERS (CONTINUED)
As of March 31, 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 table. There are no conditions or events since
that notification that management believes have changed the Company's or
the Bank's category. The following table presents the capital ratios for
the Bank and the Company for the quarter ended March 31, 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
--------------- ---------- --------------- --------- --------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 2000:
Total Capital
(to Risk Weighted Assets
- the Company) $133,815 15.37% $ 69,664 8.00% N/A N/A
Total Capital
(to Risk Weighted Assets
-the Bank) $131,479 15.13% $ 69,539 8.00% $ 86,924 10.00%
Tier I Capital
(to Risk Weighted Assets
- the Company) $133,715 15.36% $ 34,832 4.00% N/A N/A
Tier I Capital
(to Risk Weighted Assets
-the Bank) $131,379 15.11% $ 34,770 4.00% $ 52,154 6.00%
Tier I Capital
(to Average Assets
- the Company) $133,715 5.32% $100,602 4.00% N/A N/A
Tier I Capital
(to Average Assets
- the Bank) $131,379 5.23% $100,533 4.00% $125,666 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 of 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.
13
<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 three months ended March 31,
2000 and 1999, and long-lived assets by geographic area as of March 31,
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 $ 51,309 $ 37,016 $ 49,632 $ 53,669
Ireland 1,153 1,040 310 247
Canada 587 681 124 236
Cayman Islands 20 46 - -
--------------- --------------- -------------- ---------------
Total $ 53,069 38,783 $ 50,066 $ 54,152
=============== =============== ============== ===============
</TABLE>
The following represents the Company's operating revenue by service line
for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
OPERATING OPERATING
REVENUE REVENUE
SERVICE LINES: 2000 1999
--------------------------------------- ----------------- -------------------
(Dollars in thousands)
<S> <C> <C>
Custody, accounting, transfer agency,
and administration $ 33,767 $ 28,561
Investment advisory 378 361
Securities lending 2,746 1,424
Foreign exchange 2,946 1,157
----------------- -------------------
Total $ 39,837 $ 31,503
================= ===================
</TABLE>
No one customer accounted for 10% of the Company's consolidated net
operating revenues for the three months ended March 31, 2000 and 1999.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related notes, which
are included elsewhere in this Report. The Company, through its wholly owned
subsidiaries, Investors Bank & Trust Company and Investors Capital Services,
Inc., provides global custody, multicurrency accounting, institutional transfer
agency, performance measurement, foreign exchange, securities lending, mutual
fund administration and investment advisory services to a variety of financial
asset managers, including 83 mutual fund complexes, investment advisors, banks
and insurance companies. The Company provides financial asset administration
services for net assets that totaled approximately $284 billion as of March 31,
2000, including approximately $19 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
from BankBoston of its intent to terminate the outsourcing agreement. The
termination, which was effective in February 2000, will have 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.
Therefore, a net adjustment to decrease the purchase price, resulting from the
two above mentioned items, was recorded by the Company in the fourth quarter of
1999 for $2.1 million. The Bank does not anticipate a material impact on net
income due to the termination of the outsourcing agreement. The Bank was
informed by BankBoston that its decision to terminate the outsourcing agreement
was not related in any way to the Company's quality of service but was made as
part of the integration process undertaken in connection with the recently
completed BankBoston/Fleet merger.
On March 26, 1999, the Company completed the issuance and sale of
900,000 shares of Common Stock at $29 per share in a private placement to one
investor. The net capital raised in the private placement was used to support
the Company's balance sheet growth.
On October 29, 1999, the Bank entered into an agreement with Sanwa Bank
California, pursuant to which the Bank agreed to purchase the right to provide
institutional custody and related services to accounts managed by the Trust
Company of the West. The 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.
REVENUE AND INCOME OVERVIEW
The Company derives its revenues from financial asset administration
services and private banking transactions. Although interest income and
non-interest income are reported separately for financial statement presentation
purposes, the Company's clients view the pricing of the Company's asset
administration and banking service offerings on a bundled basis. In establishing
a fee structure for a specific client, management analyzes all expected revenue
and related expenses, as opposed to separately analyzing fee income and interest
income and related expenses for each from such relationship. Accordingly,
management believes net operating revenue (net interest income plus non-interest
income) and net income are the most meaningful measures of the Company's
financial results. Net operating revenue increased 37% to $53.1 million for the
quarter ended March 31, 2000 from $38.8 million for the quarter ended March 31,
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.
15
<PAGE>
Net interest income represents the difference between income generated
from interest earning assets and expense on interest bearing liabilities.
Interest bearing liabilities are generated by the Company's clients who, in the
course of their financial asset management, generate cash balances, which they
deposit on a short-term basis with the Company. The Company invests these cash
balances and remits a portion of the earnings on these investments to its
clients. The Company's share of earnings from these investments is viewed as
part of the total package of compensation paid to the Company from its clients
for performing asset administration services.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made
by its employees or information included in its filings with the 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
and the effect of BankBoston's termination of the outsourcing agreement. The
Company's actual future results may differ significantly from those stated in
any forward-looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below. Each of these factors, and
others, are discussed from time to time in the Company's filings with the 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 and 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 the
loss of key employees and clients, and have a material adverse effect on the
Company's operations.
The Company relies on certain intellectual property protections to
preserve its intellectual property rights. Any invalidation of the Company's
intellectual property rights or lengthy and expensive defense of those rights
could have a material adverse effect on the Company. 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.
16
<PAGE>
STATEMENT OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
Non-interest Income
Non-interest income increased $8.5 million to $40.1 million for the
quarter ended March 31, 2000 from $31.6 million for the quarter ended March 31,
1999. Non-interest income consists of the following items:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
---------------------------------
2000 1999 CHANGE
--------------- ------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Asset administration fees $ 39,716 $ 31,380 27 %
Computer service fees 121 123 (2) %
Other operating income 275 130 112 %
--------------- -------------
Total non-interest income $ 40,112 $ 31,633 27 %
=============== =============
</TABLE>
Asset administration fees increased $8.3 million to $39.7 million for
the quarter ended March 31, 2000 compared to $31.4 million for the quarter ended
March 31, 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,
multicurrency 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 10% to $284 billion at
March 31, 2000 from $258 billion at March 31, 1999. Of the net increase,
approximately 75% reflects assets processed for new clients and the remainder
reflects growth of assets processed for existing clients. Another significant
portion of the increase in asset administration fees resulted from the Company's
success in marketing ancillary services such as 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 investment in
FHLBB stock at March 31, 2000, compared to March 31, 1999.
17
<PAGE>
Operating Expenses
Total operating expenses increased by $10.9 million to $41.8 million
for the quarter ended March 31, 2000 compared to $30.9 million for the quarter
ended March 31, 1999. The components of operating expenses were as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
---------------------------------
2000 1999 CHANGE
-------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation and benefits $ 26,527 $ 18,897 40%
Technology and telecommunications 4,595 3,620 27
Transaction processing services 2,519 2,180 16
Occupancy 2,072 1,961 6
Professional fees 1,074 645 67
Depreciation and amortization 1,043 879 19
Travel and sales promotion 669 507 32
Amortization of goodwill 421 444 (5)
Insurance 195 189 3
Other operating expenses 2,659 1,605 66
-------------- ---------------
Total operating expenses $ 41,774 $ 30,927 35%
============== ===============
</TABLE>
Compensation and benefits expense, the largest component of expense,
increased by $7.6 million or 40% from period to period due to several factors.
The average number of employees increased 16% to 1,523 during the quarter ended
March 31, 2000 from 1,308 during the same period in 1999. This increase in the
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 $4.1 million between periods due to the increase in earnings subject
to incentive payments. Benefits, including payroll taxes, group insurance plans,
retirement plan contributions and tuition reimbursement, increased by $429,000
for the quarter ended March 31, 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 contract programming fees. Technology and
telecommunication fees increased $975,000 from period to period. The
Company's use of contract programmers to perform information systems
development projects accounted for $471,000 of the increase. Increased
hardware, software and telecommunications expenses needed to support the
growth in assets processed accounted for the remainder of the increase.
Transaction processing services expense consists of volume related
expenses including subcustodian fees and external contract services. The
increase of $339,000 from period to period was primarily due to an increase in
subcustodian fees driven by the growth in assets processed.
Professional fees increased by $429,000 from period to period. The
increase in professional fees relates primarily to consulting services related
to enhancing system functionalities.
Depreciation and amortization expense increased to $1 million for the
quarter ended March 31, 2000 from $879,000 for the quarter ended March 31, 1999.
The increase resulted from the purchase of capitalized software during 1999.
Travel and sales promotion expense consists of expenses incurred by the
sales force, client management staff and other employees in connection with
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 $162,000 to $669,000 for the quarter ended
March 31, 2000 from $507,000 for the same period in 1999, due primarily to
increased travel by the sales and client management staff.
Other operating expenses increased $1.1 million to $2.7 million for the
quarter ended March 31, 2000 from $1.6 million for the quarter ended March 31,
1999. Other operating expenses include fees for office supplies, recruiting
costs, temporary help and various fees assessed by the Commissioner of Banks of
the Commonwealth of Massachusetts. The growth in assets processed has resulted
in an overall increase in operating expenses.
18
<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. Net
interest income is affected by the volume and mix of assets and liabilities, and
the movement and level of interest rates. The table below presents the changes
in net interest income resulting from changes in the volume of interest earning
assets or interest bearing liabilities or changes in interest rates for the
quarter ended March 31, 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
Fed funds sold and
Interest earning deposits $ 78 $ 147 $ 225
Investment securities 14,194 2,538 16,732
Loans 700 (73) 627
----------- ----------- ------------
Total interest earning assets $ 14,972 $ 2,612 $ 17,584
----------- ----------- ------------
INTEREST BEARING LIABILITIES
Deposits $ 3,194 $ (21) $ 3,173
Borrowings 7,594 1,010 8,604
----------- ----------- ------------
Total interest bearing liabilities $ 10,788 $ 989 $ 11,777
----------- ----------- ------------
Change in net interest income $ 4,184 $ 1,623 $ 5,807
=========== =========== ============
</TABLE>
Net interest income increased $5.8 million or 81% to $13 million for
the quarter ended March 31, 2000 from $7.2 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 16 basis points from 1.99% to 2.15%.
Average interest-earning assets, primarily investment securities,
increased $974 million or 68% to $2.4 billion compared with the same period in
1999. Funding for the asset growth was provided by an increase in average client
deposits of $304 million or 28% and an increase in average short-term
borrowings, primarily repurchase agreements and FHLBB borrowings, of $612
million. The equity obtained in the $26 million private placement completed late
in the first quarter of the prior year allowed the Company to expand the balance
sheet with deposits that had been invested in third-party sweep products. The
effect on net interest income from changes in volume of interest-earning assets
and interest-bearing liabilities was an increase of approximately $4.2 million
for the quarter ended March 31, 2000 compared with the same quarter last year.
Average yield on interest earning assets increased 65 basis points to
6.26% this quarter from 5.61% for the same period last year. The average rate
paid by the Company on interest-bearing liabilities increased 60 basis points
from 4.08% to 4.68%. 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 $1.6 million period to
period.
Income Taxes
Taxes for the quarter ended March 31, 2000 were $3.6 million, up from
$2.8 million a year ago. The effective tax rate for the period was 32%, which
compares to 36% for the same period in the prior year. The period-over-period
decrease in the effective tax rate resulted from the restructuring of corporate
entities for state tax planning purposes.
19
<PAGE>
FINANCIAL CONDITION
INVESTMENT PORTFOLIO
The following table summarizes the Company's investment portfolio for the dates
indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
(Dollars in thousands)
<S> <C> <C>
SECURITIES HELD TO MATURITY:
Mortgage-backed securities $ 1,587,744 $ 1,464,816
Federal agency securities 259,858 227,030
State and political subdivisions 66,827 63,871
Foreign government securities 7,621 7,638
------------- -------------
Total securities held to maturity $ 1,922,050 $ 1,763,355
============= =============
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities $ 290,578 $ 239,132
Federal agency securities 52,014 52,310
Corporate debt 46,988 47,875
State and political subdivisions 35,531 36,293
------------- -------------
Total securities available for sale $ 425,111 $ 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.
20
<PAGE>
The book value and weighted average yield of the Company's securities
held to maturity at March 31, 2000, by effective maturity, are reflected in the
following table:
<TABLE>
<CAPTION>
YEARS
--------------------------------------------------------------------------------------------
UNDER 1 1 TO 5 5 TO 10 OVER 10
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------------ -------------------- -------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ 8,768 5.73% $ 826,287 6.37% $ 556,334 6.64% $ 196,355 6.78%
Federal agency securities - - 83,458 6.36 176,400 6.70 - -
State and political subdivisions - - - - - - 66,827 5.40
Foreign government securities - - 7,621 6.84 - - - -
-------- ----------- ----------- ----------
Total securities held to maturity $ 8,768 5.73% $ 917,366 6.39% $ 732,734 6.65% $ 263,182 6.43%
======== =========== =========== ==========
</TABLE>
The book value and weighted average yield of the Company's securities
available for sale at March 31, 2000 by effective maturity, are reflected in the
following table:
<TABLE>
<CAPTION>
YEARS
--------------------------------------------------------------------------------------------
UNDER 1 1 TO 5 5 TO 10 OVER 10
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------------ -------------------- -------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ - - $ 277,437 6.31% $ 13,141 6.31% $ - -
Federal agency securities - - 52,014 5.96 - - - -
Corporate debt - - - - - - 46,987 5.39%
State and political subdivisions 3,813 4.14% 20,059 4.29 11,150 4.45 510 6.01
-------- ----------- ----------- ----------
Total securities available
for sale $ 3,813 4.14% $ 349,510 6.16% $ 24,291 5.46% $ 47,497 5.40%
======== =========== =========== ==========
</TABLE>
LOAN PORTFOLIO
The following table summarizes the Company's loan portfolio for the
dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Loans to individuals $ 42,998 $ 65,010
Loans to not-for-profit
organizations 13 13
Loans to mutual funds 55,615 44,369
---------- ----------
98,626 109,392
Less: allowance for loan losses (100) (100)
---------- ----------
Net loans $ 98,526 $ 109,292
========== ==========
Floating Rate $ 98,513 $ 109,279
Fixed Rate 13 13
---------- ----------
$ 98,526 $ 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 Company's unsecured lines
of credit to mutual funds may, in the event of a default, be collateralized at
the Company's option by securities held in custody by the Company for those
mutual funds. Loans to mutual funds also include advances by the Company to
certain mutual fund clients pursuant to the terms of the custody agreements
between the Company and those clients.
At March 31, 2000, the Company's only lending concentrations which
exceeded 10% of total loans were the 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.
21
<PAGE>
The Company's credit loss experience has been excellent. There have
been no loan chargeoffs or adverse credit actions in the history of the Company.
It is the Company's policy to place a loan on non-accrual status when either
principal or interest becomes 60 days past due and the loan's collateral is not
sufficient to cover both principal and accrued interest. As of March 31, 2000,
there were no past due loans, troubled debt restructurings, or any loans on
non-accrual status. Although virtually all of the Company's loans are fully
collateralized with freely tradable securities, management recognizes some
credit risk inherent in the loan portfolio, and has recorded an allowance for
loan losses of $100,000 at March 31, 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 March 31, 2000 and March
31, 1999, indicated that an upward shift of interest rates by 200 basis points
would result in a reduction in projected net interest income of 8.0% and 8.6%
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
5.4% and 4.5% respectively.
22
<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.
23
<PAGE>
The following table presents the repricing schedule for the Company's interest
earning assets and interest bearing liabilities at March 31, 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 $ 50,000 $ - $ - $ - $ - $ 50,000
Investment securities (2) 1,165,340 218,594 321,964 365,498 275,765 2,347,161
Loans - variable rate - - - 13 - 13
Loans - fixed rate 98,513 - - - - 98,513
------------ ----------- ------------ ------------ ------------ -------------
Total interest earning
assets $ 1,313,853 $ 218,594 $ 321,964 $ 365,511 $ 275,765 $ 2,495,687
Interest bearing liabilities:
Demand deposit accounts $ 4,993 $ - $ - $ - $ - $ 4,993
Savings accounts 1,105,843 - - - - 1,105,843
Time deposit accounts 10,000 - - - - 10,000
Interest rate contracts (520,000) 60,000 120,000 340,000 - -
Short term borrowings 1,051,856 - - - - 1,051,856
------------ ----------- ------------ ------------ ------------ -------------
Total interest bearing
liabilities $ 1,652,692 $ 60,000 $ 120,000 $ 340,000 $ - $ 2,172,692
------------ ----------- ------------ ------------ ------------ -------------
Net interest sensitivity
gap during the period $ (338,839) $ 158,594 $ 201,964 $ 25,511 $ 275,765 $ 322,995
============ =========== ============ ============ ============ =============
Cumulative gap $ (338,839) $ (180,245) $ 21,719 $ 47,230 $ 322,995
============ =========== ============ ============ ============
Interest sensitive assets as a
percent of interest sensitive
liabilities (cumulative) 79.50% 89.48% 101.19% 102.17% 114.87%
============ =========== ============ ============ ============
Interest sensitive assets as a
percent of total assets
(cumulative) 49.78% 58.06% 70.26% 84.11% 94.55%
============ =========== ============ ============ ============
Net interest sensitivity gap as a
percent of total assets (12.84)% 6.01% 7.65% 0.97% 10.45%
============ =========== ============ ============ ============
Cumulative gap as a percent
of total assets (12.84)% (6.83)% 0.82% 1.79% 12.24%
============ =========== ============ ============ ============
</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.
24
<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 constantly 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 the 9.77% Capital Securities (the `Capital Securities'). Managing the
duration of the investment portfolio also provides asset liquidity. 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 $0.12 per share.
The Company's ability to pay dividends on the Common Stock may depend
on the receipt of dividends from Investors Bank & Trust Company. 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 Investors Bank & Trust Company are subject
to certain restrictions imposed by the Massachusetts Commissioner of Banks.
Subject to regulatory requirements, the Company expects to pay an annual
dividend to its stockholders, currently estimated to be in an amount equal to
$0.12 per share of outstanding Common Stock (approximately $1.8 million based
upon 14,785,763 shares outstanding as of March 31, 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 March 31, 2000 was $295 million. Each bank may
terminate its arrangement at any time and is under no contractual obligation to
provide requested funding to the Company. The Company's borrowings under these
arrangements are typically on an overnight basis. The Company believes that if
these banks were unable to provide funding as described above, a satisfactory
alternative source of funding would be available to the Company. The Company
cannot be certain, however, that such funding will be available. 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 March 31,
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
held by the Company is required to be the lesser of (i) 1% of its outstanding
residential mortgage loan principal (including mortgage pool securities), (ii)
0.3% of total assets, or (iii) total advances from the FHLBB, divided by a
leverage factor of 20. The aggregate amount of borrowing available to the
Company under this arrangement at March 31, 2000 was $829 million.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities, and
financing activities. Net cash provided by operating activities was $26 million
for the quarter ended March 31, 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 a decrease in federal
funds sold and securities purchased under resale agreements, was $98 million for
the quarter ended March 31, 2000. Net cash provided by financing activities,
consisting primarily of net activity in deposits, was $57 million for the
quarter ended March 31, 2000.
25
<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 $1.2 million and $775,000 for the three months ended March 31,
2000 and 1999, respectively.
Stockholders' equity at March 31, 2000 was $146.5 million, an increase
of $9.7 million or 7%, from $136.8 million at December 31, 1999. The ratio of
stockholders' equity to assets increased to 5.55% at March 31, 2000 from 5.36%
at December 31, 1999.
The Federal Reserve Board has adopted a system using internationally
consistent risk-based capital adequacy guidelines to evaluate the capital
adequacy of banks and bank holding companies. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
based generally upon the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a `risk-weighted'
asset base. Certain off-balance sheet items 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 March 31, 2000:
<TABLE>
<CAPTION>
AMOUNT RATIO
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 133,715 15.36%
Tier I capital minimum requirement 34,832 4.00%
------------- --------------
Excess Tier I capital $ 98,883 11.36%
============= ==============
Total capital $ 133,815 15.37%
Total capital minimum requirement 69,664 8.00%
------------- --------------
Excess Total capital $ 64,151 7.37%
============= ==============
Risk adjusted assets, net of intangible assets $ 870,796
=============
</TABLE>
26
<PAGE>
The following table summarizes the Bank's Tier I and total capital
ratios at March 31, 2000:
<TABLE>
<CAPTION>
AMOUNT RATIO
------------- --------------
(Dollars in thousands)
<S> <C> <C>
Tier I capital $ 131,379 15.11%
Tier I capital minimum requirement 34,770 4.00%
------------- --------------
Excess Tier I capital $ 96,609 11.11%
============= ==============
Total capital $ 131,479 15.13%
Total capital minimum requirement 69,539 8.00%
------------- --------------
Excess Total capital $ 61,940 7.13%
============= ==============
Risk adjusted assets, net of intangible assets $ 869,239
=============
</TABLE>
In addition to the risk-based capital guidelines, the FRB 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 average 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 March 31, 2000 was 5.32%, which is in excess of regulatory
requirements. The Bank's Leverage Ratio at March 31, 2000 was 5.23%, which is
also in excess of regulatory requirements.
27
<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>
THREE MONTHS ENDED MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 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 $ 63,187 $ 898 5.68% $ 57,033 $ 673 4.72%
Investment securities (3) 2,225,774 35,480 6.38% 1,320,355 18,748 5.68%
Loans (4) 124,802 1,416 4.54% 62,340 789 5.06%
-------------- ----------- ------------ ------------ ---------- -----------
Total interest earning assets 2,413,763 37,794 6.26% 1,439,728 20,210 5.61%
----------- ------------ ---------- -----------
Allowance for loan losses (100) (100)
Non-interest earning assets 141,225 136,428
-------------- ------------
Total assets $ 2,554,888 $ 1,576,056
============== =============
INTEREST BEARING LIABILITIES
Deposits:
Demand $ 4,459 $ 22 1.97% $ 114,025 $ 1,253 4.40%
Savings 1,137,425 12,350 4.34% 806,896 8,085 4.01%
Time 10,000 138 5.52% - - -
Short term borrowings 972,932 12,327 5.07% 360,169 3,722 4.13%
-------------- ----------- ------------ ------------ ---------- -----------
Total interest bearing liabilities 2,124,816 24,837 4.68% 1,281,090 13,060 4.08%
----------- ------------ ---------- -----------
Non-interest bearing liabilities
Demand deposits 173,461 99,911
Non-interest bearing time
deposits 65,000 65,000
Other liabilities 25,253 13,699
-------------- ------------
Total liabilities 2,388,530 1,459,700
Trust preferred stock 24,220 24,192
Equity 142,138 92,164
-------------- ------------
Total liabilities and equity $ 2,554,888 $ 1,576,056
============== =============
Net interest income $ 12,957 $ 7,150
=========== =========
Net interest margin (1) 2.15% 1.99%
============ ===========
Average interest rate spread (2) 1.58% 1.53%
============ ===========
Ratio of interest earning assets to
Interest bearing liabilities 113.60% 112.38%
============ ===========
</TABLE>
1) Net interest income divided by total interest earning assets.
2) Yield on interest earning assets less rate paid on interest bearing
liabilities.
3) Average yield on available for sale securities is based on amortized
cost.
4) Average yield on demand loans includes accrual and non accrual loan
balances.
28
<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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit 3. Certificate of Amendment of Certificate
of Incorporation of the Company
Exhibit 27. Financial Data Schedule
(b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K
during the quarter ended March 31, 2000.
29
<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: May 12, 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)
30
<PAGE>
Exhibit 3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INVESTORS FINANCIAL SERVICES CORP.
Investors Financial Services Corp. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware ("GCL"), does hereby certify as follows, pursuant to Section
242 of the GCL:
FIRST: That pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Corporation, the Board of
Directors, at a meeting held on February 15, 2000, in accordance with Section
242 of the GCL, duly adopted a resolution (i) proposing an amendment to the
Certificate of Incorporation of the Corporation, (ii) declaring said amendment
to be advisable and in the best interests of the Corporation's stockholders and
(iii) directing that the matter be submitted to the stockholders of the
Corporation for the approval of said amendment.
SECOND: The amendment to the Certificate of Incorporation of the
Corporation was duly adopted at the Annual Meeting of Stockholders of the
Corporation held on April 18, 2000, in accordance with Section 242 of the GCL.
THIRD: That in accordance with the aforementioned resolution, the
Corporation's Certificate of Incorporation is hereby amended by amending and
restating in its entirety Article FOURTH(A) thereof and substituting in lieu
thereof the following new Article FOURTH(A):
(A) The total number of shares of all classes of
capital stock which the Corporation shall have authority to
issue is 41,650,000 shares, consisting of 40,000,000 shares
of Common Stock with a par value of One Cent ($.01) per share
(the "Common Stock"), 650,000 shares of Class A Common Stock
with a par value of One Cent ($.01) per share (the "Class A
Stock"), and 1,000,000 shares of Preferred Stock with a par
value of One Cent ($.01) per share, the designations of which
are to be determined by the Board of Directors.
A description of the respective classes of stock and
a statement of the designations, preferences, voting powers
(or no voting powers), relative, participating, optional or
other special rights and privileges and the qualifications,
limitations and restrictions of the Common Stock, Class A
Stock and Preferred Stock are as follows:
<PAGE>
FOURTH: That in accordance with the aforementioned resolution, the
Corporation's Certificate of Incorporation is hereby amended by amending and
restating in its entirety Article ELEVENTH thereof and substituting in lieu
thereof the following new Article ELEVENTH:
ELEVENTH. The Corporation reserves the right to amend
or repeal any provision contained in this Certificate of
Incorporation in the manner prescribed by the laws of the
State of Delaware and all rights conferred upon stockholders
are granted subject to this reservation, PROVIDED, HOWEVER,
that in addition to the vote of the holders of any class or
series of stock of the Corporation required by law or by this
Certificate of Incorporation, but in addition to any vote of
the holders of any class or series of stock of the
Corporation required by law, this Certificate of
Incorporation or a Certificate of Designation, the
affirmative vote of the holders of shares of voting stock of
the Corporation representing at least seventy-five percent
(75%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to
vote generally in the election of directors, voting together
as a single class, shall be required to (i) reduce or
eliminate the number of authorized shares of Common Stock and
Class A Stock set forth in Article Fourth or (ii) amend or
repeal, or adopt any provision inconsistent with, Parts B and
C of Article FOURTH and Articles FIFTH, SIXTH, SEVENTH,
EIGHTH, NINTH, TENTH and this Article ELEVENTH of this
Certificate of Incorporation.
FIFTH: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the GCL.
IN WITNESS WHEREOF, Investors Financial Services Corp. has caused this
certificate to be signed by Kevin J. Sheehan, its President and Chief Executive
Officer, as of this 2nd day of May, 2000.
INVESTORS FINANCIAL SERVICES CORP.
By: /s/ KEVIN J. SHEEHAN
---------------------------------------------
Name: Kevin J. Sheehan
Title: President and Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 22,635
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 50,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 425,111
<INVESTMENTS-CARRYING> 1,922,050
<INVESTMENTS-MARKET> 1,884,623
<LOANS> 98,626
<ALLOWANCE> 100
<TOTAL-ASSETS> 2,639,427
<DEPOSITS> 1,377,567
<SHORT-TERM> 1,051,856
<LIABILITIES-OTHER> 39,261
<LONG-TERM> 0
24,225
0
<COMMON> 148
<OTHER-SE> 146,370
<TOTAL-LIABILITIES-AND-EQUITY> 2,639,427
<INTEREST-LOAN> 1,416
<INTEREST-INVEST> 36,378
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 37,794
<INTEREST-DEPOSIT> 12,510
<INTEREST-EXPENSE> 24,837
<INTEREST-INCOME-NET> 12,957
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 41,774
<INCOME-PRETAX> 11,295
<INCOME-PRE-EXTRAORDINARY> 11,295
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,266
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 2.15
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 100
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 100
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
