SOURCE: Investors Financial Services Corp.

July 14, 2005 16:15 ET

Investors Financial Services Corp. Announces Second Quarter Earnings

Revises Fiscal Year 2005 and 2006 Guidance

Announces Stock Repurchase Plan of up to $150 Million

BOSTON, MA -- (MARKET WIRE) -- July 14, 2005 -- Investors Financial Services Corp. (NASDAQ: IFIN) reported second quarter diluted earnings per share of $0.64, an increase of 28% from diluted earnings per share of $0.50 in the second quarter of 2004. Net income for the second quarter of 2005 was $44.1 million, up 30% from $34.0 million in net income in the second quarter of 2004. For the six months ended June 30, 2005, the Company reported diluted earnings per share of $1.24, an increase of 19% from $1.04 in diluted earnings per share for the same period in 2004. Net income for the six months ended June 30, 2005 was $85.1 million, an increase of 21% from $70.5 million in net income for the same period of 2004.

Results for the second quarter include securities gains of $5.6 million, or $0.06 per share, as a result of the Company continuing its strategy of replacing lower after-tax yielding municipal securities with higher after-tax yielding municipal securities and capitalizing on strong market conditions. The Company also recorded in the second quarter of 2005 a one-time benefit of approximately $0.10 per share related to its recognition of the indefinite reversal provision of Accounting Principles Board No. 23 - "Accounting for Income Taxes-Special Areas" ("APB 23") with respect to its Irish subsidiaries. As a result, the Company's effective tax rate was approximately 23% for the second quarter.

Despite a more robust sales environment, including higher volumes of sales opportunities than in the previous two fiscal years and continued closing of strategically important new business wins in the first and second quarters of 2005, the Company is revising its fiscal year 2005 and 2006 diluted earnings per share guidance. The Company expects to achieve growth of approximately 10% in diluted earnings per share in 2005 compared to diluted earnings per share of $2.09 in 2004 under Accounting Principles Generally Accepted in the United States of America ("GAAP"). From a core diluted earnings per share perspective, the Company expects 2005 diluted earnings per share to be approximately flat with 2004 GAAP diluted earnings per share of $2.09. Core diluted earnings per share for 2005 excludes the impact of securities gains and the recognition of the indefinite reversal provision of APB 23 with respect to the Company's Irish subsidiaries. Management considers core diluted earnings per share a more useful depiction of the Company's results of operations, as this measure excludes these non-core items. For 2006, the Company expects GAAP diluted earnings per share to be approximately flat compared to expected 2005 GAAP diluted earnings per share. From a core earnings perspective, the Company expects to achieve approximately 8% to 10% growth in diluted earnings per share in 2006 over 2005 core diluted earnings per share.

A number of factors have contributed to the Company's revision of its historical target for annual growth in diluted earnings per share. Key factors that are driving the change in expected diluted earnings per share include: a flatter than expected yield curve; narrower than expected reinvestment spreads; weaker than expected market-sensitive revenues, including fees linked to both the equity and foreign currency markets; and continued investments in headcount and technology to support new and existing clients. These factors are expected to be partially offset by continued strong growth in the Company's core service fees, which are driven by sales to new and existing clients and consistent growth in the Company's assets under administration. The Company's pipeline for new business remains medium and the Company continues to bid on and win mandates from new and existing customers.

Kevin J. Sheehan, Chairman and Chief Executive Officer, commented, "Since our initial public offering in November 1995, the Company achieved a compound annual growth rate in diluted earnings per share of 39%. Over the last five years, a period characterized by generally weaker financial markets and more regulation of financial products, the Company grew diluted earnings per share at an impressive 42% compound annual growth rate. However, during 2005 we have experienced sustained interest rate pressure and market sensitive revenue challenges. As a result, with less than six months remaining in 2005, we do not believe that we will meet our historical annual growth target in diluted earnings per share in 2005 and 2006. We remain confident in and committed to our business model and our ability to deliver industry leading customer service levels and financial performance, including long-term growth in diluted earnings per share in excess of industry averages. We are announcing another important new business win today, a $30 billion full-service contract with a major U.S. life insurance company."

Net operating revenue for the second quarter of 2005 grew 12% to $170.7 million from $151.8 million for the same period in 2004. Revenue from core services such as global custody, multicurrency accounting and mutual fund administration rose to $90.2 million for the second quarter, up 14% from $78.8 million from the same period in the prior year. Revenue from ancillary services including foreign exchange, securities lending, cash management, and investment advisory services increased to $32.3 million for the quarter, up 7% from $30.2 million in the second quarter of 2004. Net interest income of $42.0 million for the second quarter of 2005 was approximately flat compared to $42.1 million for the same period in 2004. Operating expenses were $113.2 million for the second quarter of 2005, up 12% from $100.7 million for the same period in 2004.

Net operating revenue for the six months ended June 30, 2005 grew 10% to $338.5 million from $307.0 million for the same period in 2004. Revenue from core services such as global custody, multicurrency accounting and mutual fund administration rose to $178.7 million for the six months ended June 30, 2005, up 15% from $154.8 million for the same period in the prior year. Revenue from ancillary services including foreign exchange, securities lending, cash management, and investment advisory services decreased to $59.0 million for the six months ended June 30, 2005, down 2% from $60.3 million in the first six months of 2004. Net interest income was approximately flat at $89.7 million for the first six months of 2005 compared to $90.5 million for the same period in 2004. Operating expenses were $218.0 million for the first six months of 2005, up 9% from $200.8 million for the same period in 2004.

Assets processed for clients totaled approximately $1.50 trillion at June 30, 2005, up 2% from $1.47 trillion at March 31, 2005 and up 25% from $1.20 trillion at June 30, 2004.

Today, the Company announced that its Board of Directors has authorized a repurchase plan of up to $150 million of the Company's common stock over the next twelve months. The Company also announced that its Board of Directors declared a cash dividend of $0.02 per share on its common stock. The dividend is payable August 15, 2005 to stockholders of record as of July 29, 2005.

For fiscal year 2005, the Company expects net operating revenue growth of approximately 10% over net operating revenue of $613.2 million in 2004. Core service fees are expected to grow by approximately 15% over 2004 core service fees. Total ancillary service fees are expected to grow approximately 5% over 2004 ancillary services fees with solid growth in both securities lending and sweep fees. Net interest income is projected to be down approximately 10% from $187.7 million in 2004. During 2005, total expenses are expected to grow by approximately 10% over 2004, driven by continued investments in headcount and technology to support new and existing clients. The Company expects to achieve a pre-tax operating margin of between 32% and 34% for 2005 and an effective tax rate for 2005 of approximately 32% as a result of the recognition of the indefinite reversal provision of APB 23 with respect to its Irish subsidiaries in the second quarter of 2005.

The Company recognized the indefinite reversal provision of APB 23 due to the projected capital needs of its Irish subsidiaries necessary to support the continued, impressive growth in net income at the Company's Dublin, Ireland, operation. The Company's Dublin operation has generated revenue growth of at least 40% in each of the past three years, driving markedly higher net income for the Dublin operation. Under the indefinite reversal provision of APB 23, the Company may not record U.S. income taxes on the undistributed earnings of its Irish subsidiaries provided that these earnings are invested permanently by the Irish subsidiaries. As a result of the recognition, the Company expects its effective tax rate to be approximately 34.5% in 2006.

From a GAAP earnings perspective, the Company expects 2006 diluted earnings per share to be approximately flat compared to expected 2005 GAAP diluted earnings per share. The Company expects annual growth in core diluted earnings per share of approximately 8% to 10% in 2006 compared to expected 2005 core diluted earnings per share. Core 2005 diluted earnings per share excludes the impact of securities gains (approximately $0.10 per diluted share for the first six months of 2005) and the recognition of the indefinite reversal provision of APB 23 with respect to its Irish subsidiaries (approximately $0.10 per diluted share). The Company expects net operating revenue growth of 8% to 10% in 2006. As discussed above, 2005 net operating revenue includes securities gains, which we do not expect to recur in 2006. The Company is basing its 2006 net operating revenue guidance on continued strength in its core service business, continued sales of core and ancillary services to new and existing clients, continued client fund flows, and a sustained flat yield curve. The Company expects approximately 8% to 10% growth in expenses in 2006 and moderate diluted earnings per share impact from its share repurchase program.

Investors Financial will broadcast a conference call, via the Internet, today, July 14, 2005 at 5:00 p.m. ET. The call will be accessible on Investors Financial's home page at www.ibtco.com. The conference call will also be available via telephone at (719) 457-2629, confirmation code 5418104. Recorded replays of the conference call will be available on the website and by dialing (719) 457-0820, confirmation code 5418104.

Investors Financial Services Corp. provides services for a variety of financial asset managers including mutual fund complexes, investment advisors, banks, and insurance companies. Through our wholly owned subsidiary, Investors Bank & Trust Company, we provide core services including global custody, multicurrency accounting, and mutual fund administration, as well as value-added services including securities lending, foreign exchange, and cash management. Offices are located in the United States, Canada, Cayman Islands, and Ireland. Visit Investors Financial on the web at www.ibtco.com.

This news release contains forward-looking statements (statements that are not historical facts) made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. These statements, including the Company's comments regarding expected diluted earnings per share and its effective tax rates for the years ending December 31, 2005 and 2006, its projected 2005 net operating revenue, core services fees, ancillary services fees, net interest income, total expenses, investments in headcount and technology, pipeline and operating margin, its projected growth in 2006 net operating revenue and expenses, and the impact on earnings per share of the Company's share repurchase program, are subject to risks and uncertainties and are based upon certain assumptions and estimates that might not be realized. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include the timing and amount of interest rate movements by the Federal Reserve, the shape of the yield curve, reinvestment spreads, the performance of global financial markets, client fund flows and the Company's ability to execute its stock repurchase plan, manage its costs and sell its services to new and existing customers and to renew agreements with existing customers. Additional factors that could also affect actual results are set forth under the heading "Certain Factors That May Affect Future Results" in the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.


Investors Financial Services Corp.
Condensed Consolidated Statements of Income (unaudited)
(Dollars in thousands, except share data)

                                For the Six              For the Three
                                Months Ended             Months Ended
                                   June 30,                 June 30,
                             2005         2004         2005         2004
                          ---------    ---------    ---------    ---------
Operating Revenue:
Asset servicing fees:
  Core service fees       $ 178,703    $ 154,849    $  90,159    $  78,755
  Ancillary service
   fees                      58,998       60,331       32,339       30,238
                          ---------    ---------    ---------    ---------
    Total asset
     servicing fees         237,701      215,180      122,498      108,993
Other operating income        1,411        1,097          626          748
Gain on sales of
 investments                  9,740          234        5,552            -
                          ---------    ---------    ---------    ---------
      Total operating
       revenue              248,852      216,511      128,676      109,741
                          ---------    ---------    ---------    ---------

Interest income             206,158      142,776      108,103       69,140
Interest expense            116,499       52,280       66,057       27,065
                          ---------    ---------    ---------    ---------
     Net interest
      income                 89,659       90,496       42,046       42,075
                          ---------    ---------    ---------    ---------
       Net operating
        revenue             338,511      307,007      170,722      151,816
                          ---------    ---------    ---------    ---------
Operating Expenses:
Compensation and benefits   120,351      109,094       63,432       53,771
Technology and
 telecommunications          25,913       20,722       13,077       10,456
Transaction processing
 services                    22,776       21,138       11,656       10,198
Depreciation and
 amortization                15,984       16,721        8,093        8,767
Occupancy                    12,840       14,260        6,227        6,869
Professional fees             6,379        7,256        3,406        4,018
Travel and sales
 promotion                    3,174        2,579        1,825        1,497
Insurance                     2,275        2,360        1,146        1,164
Other operating expenses      8,337        6,704        4,375        3,960
                          ---------    ---------    ---------    ---------
       Total operating
        expenses            218,029      200,834      113,237      100,700
                          ---------    ---------    ---------    ---------

Income Before
 Income Taxes               120,482      106,173       57,485       51,116

Provision for income
 taxes                       35,407       35,624       13,358       17,120
                          ---------    ---------    ---------    ---------
Net Income                $  85,075    $  70,549    $  44,127    $  33,996
                          =========    =========    =========    =========
Basic Earnings Per
 Share                    $    1.27    $    1.07    $    0.66    $    0.51
                          =========    =========    =========    =========
Diluted Earnings Per
 Share                    $    1.24    $    1.04    $    0.64    $    0.50
                          =========    =========    =========    =========



                             Share Information (unaudited)

                                For the Six              For the Three
                                Months Ended             Months Ended
                                  June 30,                 June 30,
                             2005         2004         2005         2004
                          ---------    ---------    ---------    ---------
Common stock
 outstanding             66,875,627   66,224,998   66,875,627   66,224,998
Weighted-average
 basic shares            66,761,409   65,976,331   66,803,946   66,115,552
Weighted-average
 diluted shares          68,443,649   67,708,273   68,247,361   67,699,191


Investors Financial Services Corp.
Condensed Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except share data)


                                        June 30,             December 31,
                                         2005                   2004
                                     -------------          -------------
         Assets
Cash and due from banks              $      30,434          $      49,059
Federal Funds sold                          11,000                      -
Securities held to maturity
 (approximate fair value of
 $6,956,891 and $5,937,462 at
 June 30, 2005 and
 December 31, 2004, respectively)        6,964,528              5,942,717
Securities available for sale            4,511,673              4,565,505
Nonmarketable equity securities             50,000                 50,000
Loans, less allowance for loan
 losses of $100 at June 30, 2005           209,820                134,530
 and December 31, 2004
Accrued interest and fees receivable       103,777                 89,292
Equipment and leasehold improvements,
 less accumulated depreciation of
 $63,263 and $61,017 at June 30, 2005
 and December 31, 2004, respectively        65,417                 67,883
Goodwill, net                               79,969                 79,969
Other assets                               379,157                188,870
                                     -------------          -------------
Total Assets                         $  12,405,775          $  11,167,825
                                     =============          =============

 Liabilities and Stockholders' Equity
Liabilities:
Deposits:
  Demand                             $     579,807          $     690,308
  Savings                                4,107,204              4,448,405
  Time                                     412,520                257,669
                                     -------------          -------------
    Total deposits                       5,099,531              5,396,382

Securities sold under repurchase
 agreements                              4,851,699              4,255,497
Short-term and other borrowings          1,353,440                594,681
Due to brokers for open trades
 payable                                    49,371                  5,475
Junior subordinated deferrable
 interest debentures                        24,774                 24,774
Accrued taxes and other expenses            58,629                 54,967
Other liabilities                          174,343                123,787
                                     -------------          -------------
    Total liabilities                   11,611,787             10,455,563
                                     -------------          -------------

Commitments and contingencies                    -                      -

Stockholders' Equity:
Preferred stock, par value $0.01                 -                      -
 (shares authorized:  1,000,000;
 issued and Outstanding:
 none at June 30, 2005 and
 December 31, 2004)
Common stock, par value $0.01                  669                    667
 (shares authorized:  175,000,000;
 issued and outstanding:
 66,875,627 and 66,595,349 at
 June 30, 2005 and December 31, 2004,
 respectively)
Surplus                                    281,868                272,536
Deferred compensation                         (360)                  (572)
Retained earnings                          500,440                418,034
Accumulated other comprehensive
 income, net                                13,662                 23,888
Treasury stock, at cost
 (73,235 shares at June 30, 2005
 and December 31, 2004)                     (2,291)                (2,291)
                                     -------------          -------------
Total stockholders' equity                 793,988                712,262
                                     -------------          -------------
Total Liabilities and
 Stockholders' Equity                $  12,405,775          $  11,167,825
                                     =============          =============


Investors Financial Services Corp.
Average Balance Sheet (unaudited)
(Dollars in thousands)


                                      Three Months Ended June 30, 2005
                                    Average                     Average
                                    Balance       Interest     Yield/Cost
                                  ------------  ------------  ------------

Interest-earning assets:
 Federal funds sold and
  securities purchased under
  resale agreements               $     51,374  $        390          3.04%
                                  ------------  ------------
 Investment securities (1)
  Mortgage-backed securities         8,162,041        75,943          3.72%
  Federal agency securities          2,339,296        21,701          3.71%
  State and political
   subdivisions                        451,807         5,280          4.67%
  Other securities                     217,989         2,537          4.66%
                                  ------------  ------------
 Total investment securities        11,171,133       105,461          3.78%
 Loans                                 222,489         2,252          4.05%
                                  ------------  ------------
  Total interest-earning assets     11,444,996       108,103          3.78%
                                  ------------  ------------
 Allowance for loan losses                (100)
 Noninterest-earning assets            670,224
                                  ------------
  Total assets                    $ 12,115,120
                                  ============
Interest-bearing liabilities:
 Deposits:
  Savings                         $  3,011,989  $     15,172          2.01%
  Time                                 129,083           946          2.93%
 Securities sold under repurchase
  agreements(2)                      5,362,821        34,197          2.55%
 Junior subordinated debentures         24,774           605          9.77%
 Other borrowings(3)                 2,001,900        15,137          3.02%
                                  ------------  ------------
 Total interest-bearing
  liabilities                       10,530,567        66,057          2.51%
                                  ------------  ------------
Noninterest-bearing liabilities:
  Demand deposits                      274,163
  Savings                               37,287
  Noninterest-bearing time
   deposits                            240,989
  Other liabilities                    267,253
                                  ------------
 Total liabilities                  11,350,259
 Equity                                764,861
                                  ------------
 Total liabilities and equity     $ 12,115,120
                                  ============
 Net interest income                            $     42,046
                                                ============
 Net interest margin (4)                                              1.47%
                                                              ============

 Average interest rate spread
  (5)                                                                 1.27%
                                                              ============
    Ratio of interest-earning
     assets to interest-bearing
     liabilities                                                    108.68%
                                                              ============


                                      Three Months Ended June 30, 2004
                                    Average                     Average
                                    Balance       Interest     Yield/Cost
                                  ------------  ------------  ------------

Interest-earning assets:
 Federal funds sold and
  securities purchased under
  resale agreements               $     60,659  $        152          1.00%
                                  ------------  ------------
 Investment securities (1)
  Mortgage-backed securities         6,469,731        46,889          2.90%

  Federal agency securities          2,064,336        12,191          2.36%
  State and political
   subdivisions                        487,186         5,621          4.62%
  Other securities                     298,770         3,260          4.36%
                                  ------------  ------------
 Total investment securities         9,320,023        67,961          2.92%
 Loans                                 163,026         1,027          2.52%
                                  ------------  ------------
  Total interest-earning assets      9,543,708        69,140          2.90%
                                  ------------  ------------
 Allowance for loan losses                (100)
 Noninterest-earning assets            567,404
                                  ------------
  Total assets                    $ 10,111,012
                                  ============
Interest-bearing liabilities:
 Deposits:
  Savings                         $  4,176,330  $     10,828          1.04%
  Time                                  30,173            76          1.01%
 Securities sold under repurchase
  agreements(2)                      3,761,352        11,439          1.22%
 Junior subordinated debentures         24,774           605          9.77%
 Other borrowings(3)                   834,316         4,117          1.97%
                                  ------------  ------------
 Total interest-bearing
  liabilities                        8,826,945        27,065          1.23%
                                  ------------  ------------
Noninterest-bearing liabilities:
  Demand deposits                      269,915
  Savings                               74,841
  Noninterest-bearing time
   deposits                            167,582
  Other liabilities                    166,403
                                  ------------
 Total liabilities                   9,505,686
 Equity                                605,326
                                  ------------
 Total liabilities and equity     $ 10,111,012
                                  ============
 Net interest income                            $     42,075
                                                ============
 Net interest margin (4)                                              1.76%
                                                              ============
 Average interest rate spread
  (5)                                                                 1.67%
                                                              ============
    Ratio of interest-earning
     assets to interest-bearing
     liabilities                                                    108.12%
                                                              ============

(1) Average yield/cost on available for sale securities is based on
    amortized cost.
(2) Interest expense includes a penalty of $2.9 million for the three
    months ended June 30, 2004 for the prepayment of two term repurchase
    agreements.
(3) Interest expense includes a contractual prepayment penalty of $1.3
    million for the three months ended June 30, 2004 for the prepayment of
    certain FHLBB borrowings.
(4) Net interest income divided by total interest-earning assets.
(5) Yield on interest-earning assets less rate paid on interest-bearing
    liabilities.


Investors Financial Services Corp.


Asset servicing fees by service lines (unaudited) (dollars in thousands)

                                         For the              For the
                                    Six Months Ended    Three Months Ended
                                         June 30,             June 30,
                                     2005       2004       2005      2004
                                  --------   --------    -------- --------

Core service fees:
  Custody, accounting and
   administration                 $178,703   $154,849    $ 90,159 $ 78,755
                                  --------   --------    -------- --------

Ancillary service fees:
    Foreign exchange                25,504     33,008      12,255   14,513
    Cash management                 16,537     12,338       9,173    6,738
    Securities lending              11,850      5,724       8,170    3,581
    Investment advisory              3,704      8,033       1,989    4,563
    Other service fees               1,403      1,228         752      843
                                  --------   --------    -------- --------
      Total ancillary service
       fees                         58,998     60,331      32,339   30,238
                                  --------   --------    -------- --------

Total asset servicing fees        $237,701   $215,180    $122,498 $108,993
                                  ========   ========    ======== ========


Change in net assets processed (unaudited) (dollars in billions):

                                            For the             For the
                                           Six Months        Three Months
                                             Ended               Ended
                                         June 30, 2005       June 30, 2005
                                         -------------       -------------

Net assets processed,  beginning of
 period                                        $1,430              $1,469
                                               ------              ------
Change in net assets processed:
  Sales to new clients                              2                   1
  Further penetration of existing clients          21                  14
  Lost clients                                    (11)                 (2)
  Fund flows and market gain                       54                  14
                                               ------              ------
    Total change in net assets processed           66                  27
                                               ------              ------
  Net assets processed, end of period          $1,496              $1,496
                                               ======              ======

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