UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K/A-1

(Mark One)

x                              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

o                                 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)

 

Registrant’s telephone number, including area code:  (617) 937-6700

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 Par Value             Registered with the NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x   No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No x

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o   No x

The aggregate market value of common stock held by non-affiliates of the registrant was $2,863,941,561 based on the last reported sale price of $44.90 on The NASDAQ Global Select Market on June 30, 2006 as reported by NASDAQ.

As of January 31, 2007, there were 65,986,040 shares of common stock outstanding.

EXPLANATORY NOTE

The purpose of this Amendment No. 1 to the Annual Report on Form 10-K/A is to include certain information that was omitted from Part III of the Annual Report on Form 10-K because it was intended to be incorporated by reference from the Company’s definitive Proxy Statement for the 2007 Annual Meeting of Stockholders. Because the Company’s definitive Proxy Statement for the 2007 Annual Meeting of Stockholders will not be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2006, the information required by Part III of the Annual Report on Form 10-K cannot be incorporated by reference and therefore must be included in the Annual Report. This Amendment No. 1 contains the information that was previously omitted from Part III of the Annual Report.

This amended Form 10-K/A does not attempt to modify or update any other disclosures set forth in the original Form 10-K, except as required to reflect the additional information included in Part III of this Form 10-K/A. Additionally, this amended Form 10-K/A, except for the additional information included in Part III, speaks as of the filing date of the original Form 10-K and does not update or discuss any other Company developments after the date of the original filing. All information contained in this amended Form 10-K/A and the original Form 10-K is subject to updating and supplementing as provided in the periodic reports that the Company has filed and will file after the original filing date with the Securities and Exchange Commission.

PART III

ITEM 10.         DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors and Executive Officers

The following table sets forth the directors and the executive officers of the Company as of April 16, 2007, their ages, and the positions currently held by them with the Company. The Company’s executive officers are appointed by, and serve at the discretion of, the board of directors. Each executive officer is a full-time employee of the Company. There is no family relationship between any executive officer and any director of the Company.

Name				Age		Position			Year Board Term Will Expire
Kevin J. Sheehan				55		Chairman of the Board and Chief Executive Officer		2007
Michael F. Rogers				49		President		n/a
John N. Spinney, Jr.				41		Senior Vice President and Chief Financial Officer		n/a
Robert D. Mancuso				46		Senior Vice President—Marketing and Client Management		n/a
Edmund J. Maroney				50		Senior Vice President—Technology		n/a
John E. Henry				42		Senior Vice President, General Counsel and Secretary		n/a
James M. Oates				60		Director		2007
Thomas P. McDermott				71		Director		2007
Frank B. Condon, Jr.				71		Director		2009
Phyllis S. Swersky				55		Director		2008
Richard P. Boyatzi				57		Director		2009
John I. Snow, III				46		Director		2009

 

Mr. Oates is chair of the compensation committee of which Messrs. Boyatzi, Condon and McDermott are also members. Ms. Swersky is chair of the audit committee of which Messrs. McDermott and Snow are

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also members. Mr. Condon is Chair of the Nominating and Corporate Governance Committee of which Messrs. Boyatzi, McDermott and Oates are also members. Ms. Swersky and Mr. Oates represent the Board of Directors on the Community Reinvestment Act Committee. The Company was organized in June 1995 to serve as the holding company for the Bank and for periods prior to that date, references to the Company mean the Bank.

Mr. Sheehan has served as a director since 1990. He has been Chief Executive Officer and Chairman of the Board of Directors since June 1995. Mr. Sheehan served as President from June 1992 to August 2001. Prior to joining the Company in May 1990 with the Company’s acquisition of the Financial Products Services Division of the Bank of New England, Mr. Sheehan was a Senior Vice President at the Bank of New England.

Mr. Rogers has been President since August 2001, and has had responsibility for all operating areas since 1990. He served as Executive Vice President from September 1993 to August 2001. Prior to joining the Company in May 1990 with the Company’s acquisition of the Financial Products Services Division of the Bank of New England, Mr. Rogers was a Vice President at the Bank of New England.

Mr. Spinney has been Senior Vice President since August 2001 and Chief Financial Officer since January 2002. Prior to joining the Company in August 2001, Mr. Spinney was an audit partner in the Financial Services Practice of KPMG LLP, a public accounting firm.

Mr. Mancuso has been Senior Vice President—Marketing and Client Management since September 1993. He joined the Company in September 1992. Prior to joining the Company, Mr. Mancuso was Eastern Region Director of Sales for PRJ Associates, a software development firm.

Mr. Maroney has been Senior Vice President—Technology since July 1991. Mr. Maroney served as a Systems Manager in the custody department prior to becoming Senior Vice President. Prior to joining the Company in May 1990 with the Company’s acquisition of the Financial Products Services Division of the Bank of New England, Mr. Maroney was Vice President at the Bank of New England.

Mr. Henry has been General Counsel of the Company since February 1996, Secretary of the Company since January 1997 and Senior Vice President since April 2000. Prior to joining the Company, Mr. Henry was an associate at the Boston law firm of Testa, Hurwitz & Thibeault, LLP. Mr. Henry is Chairman of The Arts & Business Council of Greater Boston, a non-profit organization.

Mr. Oates has been a director of the Company since June 1995. Mr. Oates has been the Managing Director of the Wydown Group, a consulting firm specializing in start-ups, since 1994. Mr. Oates served as President and Chief Executive officer of Neworld Bancorp Incorporated from 1984 to 1994 and Chairman of Hudson Castle Group Inc., from 1995 to 2006. Mr. Oates is a Director and Chairman of the Investment Committee and Member of the Audit and Personnel Committees of Connecticut River Bancorp, Inc., and Connecticut River Bank. Mr. Oates is also a Director and Member of the Executive, Compensation, Audit and Finance Committees and Chairman of the Nominating Committee of Stifel Financial Corporation, a Director of the New Hampshire Trust Co., a Director of twenty-five Phoenix Mutual Funds and Chairman of the Board of Trustees of the John Hancock Trust and John Hancock Funds II. Mr. Oates is Chairman of the Board of Directors and a Member of the Executive and Compensation Committees of Emerson Investment Management, Inc. Mr. Oates is also a member of the Finance and Investment Committee of the Endowment for Health, a New Hampshire non-profit corporation and President of the Board of Trustees of Middlesex School.

Mr. McDermott has been a director of the Company since June 1995. He has been Managing Director of TPM Associates, a consulting firm, since January 1994. He served as Managing Partner, New England Area of Ernst & Young LLP from 1989 to 1993. Mr. McDermott is also a director of Harvard University—LASPAU and director Emeritus of ACCION International.

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Mr. Condon has been a director of the Company since April 1986. From July 1982 to July 1993, he was Chief Executive Officer and President, and from July 1993 to April 1997 he was Chief Executive Officer and Chairman of Woodstock Corporation, a Boston-based investment management firm and of its wholly owned subsidiary, Woodstock Service Corporation, a provider of financial services. Mr. Condon also serves as a Manager of Coal, Energy Investments & Management, LLC and as a consultant to Woodstock Corporation.

Ms. Swersky has been a director of the Company since February 1996. She has been President of The Meltech Group, a consulting firm specializing in business advisory services for high-growth potential businesses, since 1995. Ms. Swersky has served in various executive management positions in the computer software and services industry including chief financial officer, chief operating officer and chief executive officer. Ms. Swersky also serves as a Director of Art Technology Corp., an e-commerce software company, and Berkshire Life Insurance Company of America, Inc.

Mr. Boyatzi joined the Company as a director in January 2006. From 2002 to 2004, Mr. Boyatzi served as the U.S. Financial Markets Consulting Practice Leader with IBM Global Consulting Services. From 1977 to 2002, Mr. Boyatzi served in the Consulting Practice of PricewaterhouseCoopers focusing on financial services in the United States and Europe.

Mr. Snow joined the Company as a director in February 2006. Mr. Snow has been a Managing Director of Boston Projects, Inc., an alternative investment management firm, since 2000. He served in other positions with Boston Projects, Inc. from 1989 to 2000, prior to which he was associated with KPMG LLP from 1984 to 1989. Mr. Snow currently serves as a Director for the boards of Advanced Duplication Services, Hudson Castle Group, Inc., Hoffco, Inc., Porter Group and Library System Services, Inc. Mr. Snow is a member of the Investment Committee of the New Hampshire Charitable Foundation, a member of the Investment Committee for the Endowment for Health, a New Hampshire non-profit corporation, and President of the Board of Trustees of the Winchester (MA) Foundation for Educational Excellence.

A director may be removed for cause, which is generally defined under Delaware law as an event of a substantial nature which directly affects the rights and interests of a company’s stockholders, such as disclosing trade secrets of the Company or embezzling corporate funds, by a vote of at least a majority of the shares of the Company’s capital stock entitled to vote in the election of directors. A director may be removed without cause by a vote of at least seventy-five percent of the shares of the Company’s capital stock entitled to vote in the election of directors.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s directors, executive officers and holders of more than 10% of the Company’s common stock (collectively, “Reporting Persons”) to file with the Securities and Exchange Commission (the “Commission”) initial reports of ownership and reports of changes in ownership of common stock of the Company. Such persons are required by regulations of the Commission to furnish the Company with copies of all such filings. Based on its review of the copies of such filings received by it with respect to the year ended December 31, 2006, the Company believes that all Reporting Persons complied with all Section 16(a) filing requirements in the year ended December 31, 2006.

Code of Conduct

We maintain a Code of Conduct consistent with the rules and regulations of the Securities Exchange Act of 1934 that applies to all of our employees and directors. Our Code of Conduct is available on our website at www.ibtco.com.

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Stockholder Nominations

Our board’s nominating and corporate governance committee will consider nominees recommended by stockholders. Any such recommendations should be submitted in writing to our Secretary at our principal executive offices in accordance with the nominating procedures set forth in our by-laws. Nominees recommended by stockholders will be evaluated in the same manner as nominees identified by management, the board or the nominating and corporate governance committee. The committee did not receive any stockholder nominee recommendations in 2006.

Audit Committee

Our board maintains an audit committee comprised of Phyllis S. Swersky, Chair, Thomas P. McDermott and John I. Snow III, all of whom have been determined to be independent. Our board of directors has determined that Ms. Swersky and Mr. McDermott are “audit committee financial experts” as defined in the applicable rules and regulations of the Securities Exchange Act of 1934.

ITEM 11.         EXECUTIVE COMPENSATION.

Compensation Discussion and Analysis

In the paragraphs that follow, we will provide a detailed overview and analysis of our compensation programs and policies, the material compensation decisions we have made under those programs and policies, and the material factors that we considered in making those decisions. Later in this report under the heading “Executive Compensation” are tables which contain specific information about the compensation earned by or paid during 2006 to the following individuals, whom we refer to as our named executive officers:

·       Kevin J. Sheehan, Chairman and Chief Executive Officer

·       John N. Spinney, Jr., Senior Vice President and Chief Financial Officer

·       Michael F. Rogers, President

·       Edmund J. Maroney, Senior Vice President—Technology

·       Robert D. Mancuso, Senior Vice President—Marketing and Client Management

The discussion below is intended to help you understand the detailed information provided in those tables and to put that information into context within our overall compensation program.

Overview

Our executive compensation program is administered by the four member compensation committee of our board of directors. The four members of the compensation committee are independent non-employee directors, each of whom qualifies as an “outside director” for purposes of Section 162(m) of the Internal Revenue Code.

Each year, the compensation committee establishes the compensation of the chief executive officer. Each year, the chief executive officer determines and recommends the compensation of the other executive officers of the Company, and those recommendations are reviewed, amended as appropriate and approved by the compensation committee. Various models and matrices used by the compensation committee in setting executive compensation are prepared at the direction of the committee by our chief executive officer, our chief financial officer and/or our general counsel. After establishing and approving the compensation packages, the compensation committee then recommends those packages to the full board for approval.

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Objectives

Our compensation policy for executive officers is designed to achieve the following objectives:

·       To motivate management to satisfy the increasing demands of our large, global, sophisticated and high-growth client base;

·       To drive the profitability, competitive posture and dimensions of our company while increasing stockholder value;

·       To reward executives in accordance with our achievement of annual earnings objectives as well as long-term stock performance goals;

·       To recognize individual initiative and achievement; and

·       To provide competitive compensation that will attract, retain and motivate qualified key executives.

Methods for Determining and Assessing Compensation Levels and Programs

The financial services industry is extremely competitive with regard to attracting and retaining qualified personnel at all levels. That competition is even more intense for senior management. We compete for employees and management with companies possessing far greater resources. Each year we are challenged to create executive compensation programs that will attract and retain the best and the brightest while, at the same time, remaining affordable for the Company.

We seek to meet this challenge by ensuring that the majority of compensation for our senior executives is incentive based. As a result, material increases or decreases in compensation are driven by our financial performance and the individual performance of senior executives. In short, if we don’t earn it, we don’t pay it.

Annual Review of Market Data

Each year, we conduct a benchmark study of compensation in the financial services industry. In 2006, we relied primarily on a database provided by Equilar, Inc. which aggregates information from proxy statements and other documents filed with the Securities and Exchange Commission. In addition, we used data from third party compensation surveys, including Mercer Human Resources Consulting and McLagan Partners.

Reports generated from the Equilar database and relevant surveys allowed the compensation committee to review and compare base salary, bonus, total cash compensation, equity compensation and other long term compensation at 21 companies in the financial services industry and financial services technology industry. These comparator companies include State Street Corporation, the Bank of New York, Northern Trust, Mellon Financial Corp., SEI Investments Co., J.P. Morgan Chase, PNC Financial Services Group, Inc. and Synovus Financial Corp.

The compensation committee conducted various analyses of the compiled compensation data, including adjustments based on revenue and growth rate. The compensation committee reviewed each component of compensation as well as the total mix of compensation. Each year, the compensation committee considers the advisability of engaging an independent compensation consultant. In 2006, the committee did not engage an independent compensation consultant.

Elements of Our Compensation Program

Our compensation program for executive officers consists of the following elements:

·       Base salary, which is determined on an annual basis;

·       Annual incentive compensation in the form of cash bonuses which are based on the achievement of pre-determined financial objectives;

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·       Long-term equity incentive compensation;

·       Post-employment benefits, including employment agreements, change-in-control employment agreements and retirement benefits; and

·       Perquisites and health and welfare benefits.

These elements are considered both individually and, more importantly, as components of a total package. When the compensation committee reviews the competitiveness of our total compensation package for senior executives, the committee recognizes that each individual element may be slightly above or below competitive targets. The committee seeks to ensure that the entire package, viewed together, remains competitive.

Base Salary

Base salary for executive officers is intended to be competitive with the base salaries offered for similar executive positions at other companies in the financial services industry and related industries, and reflects scope of responsibility, external compensation data, our financial performance and individual performance. Generally, base salary adjustments are approved annually prior to December 31, with changes effective the following January 1.

In November 2005, the compensation committee set the base salaries for executive officers for 2006 at a level the committee believes reflected a mid range of the competitive level necessary to retain and motivate the senior executives. Our board approved the 2006 base salaries for senior executives in November 2005. In November 2006, the compensation committee set the base salaries for executive officers for 2007, taking into account competitive information and our earnings performance. Messrs. Sheehan, Rogers, Maroney and Mancuso received no increase in base salary for 2007, while Mr. Spinney received an increase of 11%.

Incentive Bonus Compensation

Incentive bonus compensation for executive officers is paid under our Senior Executive Bonus Plan and is based on achieving predetermined targets for GAAP earnings per share. The compensation committee believes that GAAP earnings per share provide an objective measure of senior executives’ success in increasing shareholder value. The committee may decide in the future to use additional or different performance measures for the payment of incentive bonus compensation.

The targets for earnings per share are established by the compensation committee within the first 90 days of each fiscal year. The targets are set out in a matrix that specifies bonus compensation as a percentage of base salary depending on the level of earnings per share performance achieved during the year. Once established for a fiscal year, the specific targets under the performance goals may be modified only with the approval of the full board of directors, except to reflect changes in the Company’s common stock (such as stock splits, stock dividends or recapitalizations). There were no modifications to the 2006 earnings per share targets in the matrix.

The compensation committee determines earnings per share target levels based on a review of the Company’s budget and strategic plan for the year, as well as relevant market conditions and other external factors. No payments will be made under our Senior Executive Bonus Plan to the extent minimum performance goals are not met. In addition, the compensation committee designs the matrix so that the top range of compensation is only earned with exceptional earnings out-performance. Payment of the incentive bonus compensation is subject to a review of each executive’s individual performance. Currently, all payments are made in cash.

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If the earnings upon which incentive bonus payments have been paid are restated, the compensation committee and the full board of directors, with the assistance of outside experts as appropriate, will conduct a detailed analysis of all relevant factors to determine whether the refund of any amounts paid is appropriate. The factors to be reviewed include, among other things:

·       Whether evidence of fraud, malfeasance or manipulation of accounting methods to achieve results exists;

·       The materiality of the restatement and the impact on bonus payments;

·       Whether bonus caps were reached in any impacted year; and

·       Whether a legal requirement to refund bonuses exists.

Incentive Bonus Compensation in 2006.

The earnings per share incentive bonus compensation targets for 2006 were set by the compensation committee and approved by our full board of directors in January 2006. Our executive officers were eligible to receive incentive bonus compensation as a percentage of base salary ranging from 0% to 325%, depending on the level of earnings per share performance achieved during the year. Our 2006 earnings per share of $2.28 resulted in payments to our named executive officers equal to 190% of base salary, a decrease from payments of 210% of base salary in 2005. Accordingly, approximately 66% of the 2006 cash compensation for our executive officers was incentive based, tied directly to earnings per share performance.

Incentive Bonus Compensation in 2007.

In January 2007, the compensation committee set earnings per share incentive bonus compensation targets for the year ended December 31, 2007. The named executive officers will be eligible to receive incentive bonus compensation as a percentage of base salary ranging from 0% to 325%, depending on the level of earnings per share performance achieved during the year. As stated above, the compensation committee designed the 2007 matrix so that the top range of compensation is only earned with exceptional earnings out-performance. If the proposed business combination with State Street Corporation is consummated as planned in 2007, incentive bonus compensation received by the named executive officers will be determined by their change in control employment agreements and any additional agreement they may individually execute with State Street Corporation.

Mr. Mancuso’s Sales Commission Agreement

Mr. Mancuso is not eligible to participate in the Senior Executive Bonus Plan. Instead, Mr. Mancuso has entered into a Sales Commission Agreement with the Company under which he is eligible to receive commission based on business sold by Mr. Mancuso, as well as an override commission on business sold by his staff. Commissions are paid based on a percentage of revenue received from the applicable client during the first year of the relationship. Mr. Mancuso’s commissions are not capped.

Long-Term Equity Incentive Compensation

The compensation committee believes that long-term equity incentive compensation aligns the interests of executive officers with those of our stockholders. The committee also believes that equity ownership by executive officers helps to balance the short-term focus of annual incentive bonus compensation with an emphasis on long-term financial results and may help to retain key executives.

The compensation committee continually evaluates all forms of long-term equity incentive compensation for executives, including stock options, restricted stock, restricted stock units and stock

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appreciation rights. The compensation committee to date has primarily used stock options for long-term equity incentive compensation. The committee believes that stock options granted at fair market value are an effective incentive tool because they have no value to the executive unless our stock price increases. In addition, the committee believes that providing for vesting periods of at least four years and a term of ten years, encourages executives to focus on long-term financial results, rather than short term gains. At the same time, the committee recognizes that in a falling stock market, the Company will continue to incur expense related to stock options despite the fact that the options may have little or no value to an executive. The committee believes that the benefits of our stock option program outweigh any negative aspects.

When establishing equity incentive grant levels for executives, the compensation committee considers information from our annual compensation benchmarking study, previous grants of equity incentives, vesting schedules and exercise prices of outstanding equity incentives and the current stock price.

Historically, virtually all stock options to executive officers were granted at the regularly scheduled November meeting of the full board of directors. In 2006, the committee conducted an extensive evaluation of stock option grant practices, and determined to move the grant date for equity incentives to the first quarter of each fiscal year, after results for the prior year are finalized and reported. As a result, no grants of stock options were made by the compensation committee to named executive officers in 2006. In January 2007, the compensation committee and the full board of directors approved stock option grants to the named executive officers as set forth in the following table. The grants below have an exercise price of $46.90 which is equal to the fair market value of the Company’s common stock on the date of grant and vest in 108 equal monthly installments over nine years.

 

If the proposed business combination with State Street Corporation is consummated, the unvested portion of the above grants will vest at the closing date.

Just as our shareholders put their money at risk when they invest in our company, we believe that a significant portion of our executives’ compensation should be at risk, and that the portion at risk should increase with the executive’s level of responsibility. For example, only 12% of Mr. Sheehan’s total compensation related to 2006 was fixed (in the form of salary) and the remaining 88% was at risk: 22% was represented by his incentive bonus compensation and 66% by his long-term equity incentive opportunity granted in January 2007. We believe that this weighting of performance-based at-risk compensation most effectively meets our critical objectives of performance alignment and long-term retention of top talent.

Post-Employment Benefits

Employment and Change of Control Agreements.

Each named executive officer is a party to an employment agreement and a change of control employment agreement with us.

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The employment agreements provide for the key terms of employment for each named executive officer, define grounds for termination of the executive by us for cause and provide for payments to the executive in the event of termination by us for no cause or certain terminations by the executive for good cause. If we terminate an executive for no cause or the executive terminates employment for good cause, the executive will receive his salary, bonus and health and welfare benefits for the remainder of the contract term or two years, whichever is greater. A detailed description of the employment agreements is contained below under the heading “Potential Payments Upon Termination or Change-in-Control.”

The change of control employment agreements are renewed automatically each year and become effective upon a change in control of the Company. The agreements provide that in the event of a termination during the three-year effective term of the agreement, whether by the Company or its successor without cause, or by the executive for good reason, the terminated executive will receive a lump sum payment equal to three times the executive’s most recent annual salary plus a payment equal to three times the highest of the executive’s three most recent annual bonuses, as well as continuing benefits and medical coverage for three years. In addition, the executive will receive the actuarial equivalent of the benefit under the Company’s defined benefit and supplemental pension plans that the executive would receive if his employment continued for three years after termination. In addition, Messrs. Rogers and Maroney will receive age and service credit to age 55 under those plans. Payments under the change of control agreements which are subject to excise tax will be “grossed up” by the Company. A detailed description of the change of control employment agreements is contained below under the heading “Potential Payments Upon Termination or Change-in-Control.”

In setting the terms and conditions of the employment agreements and change of control agreements, the compensation committee consulted with outside experts experienced in establishing executive employment agreements in the financial services industry. In addition, the compensation committee reviewed information regarding post-employment benefits offered by other financial services organizations. As a result of its research, the compensation committee made the following determinations:

·       In order to focus on executing the Company’s strategic plans and increasing shareholder value, senior executives should be free of concerns regarding their employment status in the event of a change of control or other management change;

·       During negotiation of the terms of any change of control, executives will not be distracted from obtaining the best transaction for shareholders, regardless of the executive’s resulting individual employment status, if those executives have appropriate personal protections, including provisions allowing termination at the executive’s option during a specified window after the change of control; and

·       Because employment agreement and change of control agreement protections are common in the extremely competitive market for financial services executives, failure to provide these protections could result in our inability to attract and retain key talent.

Accordingly, the compensation committee believes that the employment agreements and change in control agreements are in the best interest of shareholders because they help the Company attract and retain key talent and allow senior executives to execute the Company’s business plans and strategic transactions free from distraction and with a sole focus on driving shareholder value.

The terms of the employment agreements and change of control agreements are reviewed annually by the compensation committee and the full board of directors.

Please note that the tabular disclosures set forth in this report regarding post termination payments are based on an assumed acquisition date of December 31, 2006 as well as other assumptions prescribed by regulation. The tables in this report do not reflect actual payments that may be received by named executive officers in the proposed business combination with State Street Corporation.

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Pension Plan and Supplemental Executive Retirement Plan.

We maintain a qualified pension plan and a non-qualified supplemental executive retirement plan, or SERP. Benefit accruals under our pension plan were frozen for all participants in 2004 and as to all named executive officers in 2002. Benefits payable to named executive officers under our pension plan and SERP are based on years of service and final average monthly compensation. A detailed presentation of benefits payable to our named executive officers under these retirement plans are set forth below under the heading “Pension Benefits.”

Each year, the compensation committee considers the appropriateness of maintaining the pension plan and SERP as well as the levels of compensation provided under the plans. The compensation committee believes, based on its review of the market data discussed above, that the retirement benefits provided by the pension plan and the SERP have remained common in the financial services industry, despite the fact that they may be declining in popularity in other industries. In order to continue to attract and retain top-level talent in the financial services industry, the committee believes that these benefits are a necessary component of compensation for key executives. The amount accrued each year for a named executive under the pension plan and SERP is determined based on actuarial calculations. The compensation committee and full board of directors reviews and approves the obligation accrued for each named executive under the SERP on an annual basis.

401(k) Plan.

Our named executive officers are entitled to participate in our 401(k) Plan on the same terms and conditions as all employees.

Perquisites and Health and Welfare Benefits

The compensation committee recognizes that the demands of our large, global, sophisticated and high growth clients increasingly require the 24 hour a day, seven day a week availability of senior executives. The compensation committee has implemented a limited program of perquisites based on practices common for senior executives in the financial services industry with the goals of:

·       Ensuring that the total compensation package for senior executives remains competitive; and

·       Providing benefits that lessen the impact of or compensate for intrusions into personal lives of executives necessitated by the global nature and fast pace of our business.

Our named executive officers receive the following perquisites, paid for by the Company: car allowance, parking, tax and estate planning, executive life insurance and supplemental long-term disability insurance. Dollar amounts associated with these items are set forth below in the Summary Compensation Table and related footnotes. The compensation committee believes that these perquisites are an important element of a competitive compensation package for senior executives in the financial services industry, and help the company to attract and retain key executives.

Our named executive officers also are entitled to participate in the health and welfare programs provided to all employees, on the same terms as other employees. These programs include health insurance, dental insurance, a vision plan and various other programs and discounts. The compensation committee believes these programs are essential components of compensation for employees at all companies of the size and scope of our Company.

Security Ownership Requirements and Hedging

We do not impose equity or security ownership guidelines on executive officers. Because our executive officers traditionally have maintained significant ownership positions in our common stock, the

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compensation committee does not believe ownership guidelines are necessary at this time. Our insider trading policy prohibits employees from buying or selling derivative securities based on the common stock of Investors Financial Services Corp.

Impact of Tax and Accounting Treatment of Executive Compensation

In order to calculate the true cost of executive compensation to the Company, the compensation committee must consider the tax and accounting treatment of various forms of compensation. The Internal Revenue Code and related regulations provide generally that in order to qualify for a tax deduction, compensation in excess of $1 million paid to a public corporation’s executive officers must qualify as performance-based compensation. Compensation that does not qualify for a tax deduction is, in effect, more expensive for the Company. The compensation committee seeks to ensure that virtually all compensation paid to executive officers is tax deductible under Federal law. Accordingly, the Company’s Senior Executive Bonus Plan has been approved by shareholders pursuant to the requirements of Section 162(m) of the Internal Revenue Code.

The compensation committee also considers the impact of accounting treatment on compensation expense. With the requirement under FAS 123R to expense stock options, the committee now considers issues, such as vesting schedules, that impact the amount of compensation expense recognized in a financial reporting period, creating additional complexities in compensation planning. In addition, the compensation committee reviews the accounting impact of different forms of equity compensation, including stock options and restricted stock.

We continue to monitor the regulatory developments under Internal Revenue Code Section 409A, which was enacted as part of the American Jobs Creation Act of 2004. Section 409A imposes substantial limitations and conditions on nonqualified deferred compensation plans, including certain types of equity compensation and separation pay arrangements. We intend to amend our compensation arrangements, if necessary, in order to ensure their full compliance with the recently released final regulations under Section 409A in accordance with applicable deadlines.

Conclusion

The compensation committee is satisfied that the executive officers of the Company are dedicated to achieving significant improvements in the long-term financial performance of the Company and that the compensation policies and programs implemented and administered have contributed and will continue to contribute towards achieving that goal.

COMPENSATION COMMITTEE REPORT

The compensation committee of the board of directors of the Company has reviewed and discussed the Compensation, Discussion and Analysis contained in this Annual Report on Form 10-K/A with management and, based on such review and discussions, the compensation committee recommended that the Compensation Discussion and Analysis be included in this report.

 

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Summary Compensation Table

The following table provides certain summary information concerning the compensation earned for services rendered in all capacities for the year ended December 31, 2006 by our chief executive officer, chief financial officer and each of our three other most highly compensated executive officers whose total compensation for 2006 was in excess of $100,000 and who were serving as executive officers at December 31, 2006 (the “named executive officers”). No other executive officers who would have otherwise been includable in this table on the basis of total compensation for 2006 have been excluded by reason of their termination of employment or change in executive status during that year.

(1)             Amounts represent the aggregate expense recognized for financial statement reporting purposes with respect to 2006 in accordance with FAS123R for stock options granted to the named executive officer.

FAS 123R expense for stock options is based on the fair value of the options on the date of grant using the Black-Scholes option pricing model. The options resulting in the expense listed in the table above were granted on November 17, 2003 and June 15, 2004. The fair value of each option grant was estimated on the date of grant using the Black-Scholes valuation model with the following assumptions for the 2003 and 2004 grants, respectively: a risk-free interest rate of 2.77% and 3.40%, an expected life of four years, an expected volatility of 55.03% and 51.73%, and a dividend yield of 0.16% and 0.16%. Mr. Maroney also received an automatic reload grant on November 13, 2006. The Black-Scholes assumptions for that grant were: a risk free interest rate of 4.65%, an expected life of 2 years, an expected volatility of 35.58% and a dividend yield of 0.23%.

(2)             For Messrs. Sheehan, Spinney, Rogers and Maroney, the amounts represent payments pursuant to the Company’s Executive Bonus Plan earned in 2006, a portion of which were paid in 2007. For Mr. Mancuso, amounts represent payments made in 2006 pursuant to Mr. Mancuso’s sales commission agreement with the Company, some of which payments relate to sales made in 2005.

(3)             Amounts represent the aggregate change in the actuarial present value of the named executive officer’s accumulated benefit under all defined benefit and actuarial pension plans (including the tax-qualified pension plan and the non-qualified SERP) from December 31, 2005 (the pension plan measurement date used for financial statement reporting purposes with respect to the Company’s audited financial statements for the 2005 fiscal year) to December 31, 2006 (the pension plan measurement date used for financial statement reporting purposes with respect to the Company’s audited financial statements for the 2006 fiscal year).

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(4)             Amounts include the following compensation and perquisites:

(a)              Includes an allowance for a lease of a car.

(b)             Fees for parking privileges at the Garage at 100 Clarendon.

(c)              Fees paid to (1) a public accounting firm for personal tax consulting and preparation and (2) to a law firm for estate planning.

(d)             Amounts paid by the Company to compensate for the cost of life insurance premiums for the benefit of the named executive officer.

(e)              Amounts paid by the Company to compensate for the cost of additional Long-Term Disability insurance.

(f)               The dollar value of matching contributions made pursuant to the Company’s 401(k) plan, a qualified employee benefit defined contribution plan, for 2006.

Grants of Plan-Based Award

The table below shows each grant of an award made to a named executive officer under any plan during the year ended December 31, 2006.

(1)          These columns reflect the threshold, target and maximum payout levels under our Senior Executive Bonus Plan for 2007. The actual amount earn by each named executive officer is reported under the Non-Equity Incentive Plan Compensation column in the Summary Compensation Table. Additional information about our Senior Executive Bonus Plan is included in the Compensation Discussion and Analysis section of this report.

(2)          This column reflects the number of stock options granted under our 2005 Equity Incentive Plan. The only grant to a named executive officer in 2006 was an automatic “reload” option grant to Mr. Maroney in connection with the exercise of vested options. In the exercise, Mr. Maroney surrendered to the Company shares then owned by him in payment of the exercise price and received a reload option grant equal to the number of shares surrendered. The reload option grant has an exercise price equal to the fair market value on the date of grant and has the same expiration date as the options that were exercised.

(3)          Pursuant to Mr. Mancuso’s Sales Commission Agreement, Mr. Mancuso is entitled to set percentages of revenue derived from sales made by him or his staff. The Sales Commission Agreement does not cap Mr. Mancuso’s commission eligibility.

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Outstanding Equity Awards at Fiscal Year-End

The table below shows outstanding equity awards at December 31, 2006 for each named executive officer.

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(1)          Amounts represent incentive stock options and nonqualified stock options that are aggregated as one grant for vesting purposes. The original grant vests in 48 equal monthly installments of 625 shares beginning on November 17, 2003 (the original grant date). In any given month, the 625 shares that vest will come from either the incentive stock option or the nonqualified stock option, in accordance with Internal Revenue Code Requirements.

(2)          Amounts represent incentive stock options and nonqualified stock options that are aggregated as one grant for vesting purposes. The original grant vests in 48 equal monthly installments of 417 shares beginning on November 17, 2003 (the original grant date). In any given month, the 417 shares that vest will come from either the incentive stock option or the nonqualified stock option, in accordance with Internal Revenue Code Requirements.

(3)          Amounts represent incentive stock options and nonqualified stock options that are aggregated as one grant for vesting purposes. The original grant vests in 48 equal monthly installments of 1,042 shares beginning on June 15, 2004 (the original grant date). In any given month, the 1,042 shares that vest will come from either the incentive stock option or the nonqualified stock option, in accordance with Internal Revenue Code Requirements.

(4)          Amounts represent incentive stock options and nonqualified stock options that are aggregated as one grant for vesting purposes. The original grant vests in 48 equal monthly installments of 521 shares beginning on November 17, 2003 (the original grant date). In any given month, the 521 shares that vest will come from either the incentive stock option or the nonqualified stock option, in accordance with Internal Revenue Code Requirements.

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Option Exercises

The following table sets forth certain information regarding stock option exercises by the named executive officers in 2006 and the number and the value realized by each named executive officer through stock option exercises in 2006.

(1)          Calculated as the difference between the fair market value of the underlying common stock at the exercise date of the options and the aggregate exercise price. Actual gains on stock option exercises depend on the value of the underlying common stock on the date the common stock is actually sold.

Pension Benefits

The following table sets forth for each of the Investors Bank & Trust Company Pension Plan (the “Pension Plan”) and the Investors Bank & Trust Company Supplemental Executive Retirement Plan (the “SERP”), the number of years of service credited to the named executive officer under the plan as of December 31, 2006 and the actuarial present value of the named executive officer’s accumulated benefit under each plan as of December 31, 2006. There were no payments or benefits paid to any named executive officer during the year ended December 31, 2006.

(1)          Mr. Spinney is not a participant in the Pension Plan.

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