SOURCE: Investors Financial Services Corp.

October 19, 2005 16:15 ET

Investors Financial Services Corp. Announces Third Quarter Earnings

BOSTON, MA -- (MARKET WIRE) -- October 19, 2005 -- Investors Financial Services Corp. (NASDAQ: IFIN) reported diluted earnings per share of $0.53 for the third quarter of 2005. The Company also reported diluted earnings per share of $0.53 for the third quarter of 2004. Net income for the third quarter of 2005 was $35.2 million, down 2% from $36.1 million in net income for the third quarter of 2004. For the nine months ended September 30, 2005, the Company reported diluted earnings per share of $1.77, an increase of 13% from $1.57 in diluted earnings per share for the same period in 2004. Net income for the nine months ended September 30, 2005 was $120.3 million, an increase of 13% from $106.7 million in net income for the same period of 2004.

Kevin J. Sheehan, Chairman and Chief Executive Officer, commented, "Investors Financial Services Corp. produced solid results during the third quarter of 2005. Revenue from core service fees grew 25% year-over-year while revenue from ancillary service fees grew 42% year-over-year, offsetting expected weakness in net interest income. The strength in our core and ancillary service fee lines was driven primarily by new client wins, including the recent conversion of over $150 billion in assets from our European outsourcing client and a major U.S. life insurance company. Our assets processed now total a record $1.7 trillion, up 13% linked quarter and 42% year-over-year. We remain confident in our ability to meet our estimates for growth in diluted earnings per share for 2005."

Net operating revenue for the third quarter of 2005 grew 14% to $169.3 million from $148.8 million for the same period in 2004. Revenue from core services such as middle office outsourcing, global custody, multicurrency accounting and mutual fund administration rose to $95.4 million for the third quarter of 2005, up 25% from $76.6 million for the same period in the prior year. Revenue from ancillary services including foreign exchange, securities lending, cash management, and investment advisory services increased to $33.4 million for the quarter, up 42% from $23.5 million in the third quarter of 2004. Net interest income of $38.0 million for the third quarter of 2005 declined 21% from $48.3 million for the same period in 2004. Operating expenses were $116.1 million for the third quarter of 2005, up 23% from $94.5 million for the same period in 2004.

Results for the third quarter include securities gains of $1.4 million, or $0.01 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.

Net operating revenue for the nine months ended September 30, 2005 grew 11% to $507.8 million from $455.8 million for the same period in 2004. Revenue from core services such as middle office outsourcing, global custody, multicurrency accounting and mutual fund administration rose to $274.2 million for the nine months ended September 30, 2005, up 18% from $231.5 million for the same period in the prior year. Revenue from ancillary services including foreign exchange, securities lending, cash management, and investment advisory services increased 10% to $92.4 million for the nine months ended September 30, 2005 from $83.8 million in the first nine months of 2004. Net interest income declined 8% to $127.7 million for the first nine months of 2005 from $138.8 million for the same period in 2004. Operating expenses were $334.2 million for the nine months ended September 30, 2005, up 13% from $295.3 million for the same period in 2004.

Assets processed for clients totaled $1.7 trillion at September 30, 2005, up 13% from $1.5 trillion at June 30, 2005 and up 42% from $1.2 trillion at September 30, 2004.

Today, the Company announced that its Board of Directors declared a cash dividend of $0.02 per share on its common stock. The dividend is payable November 15, 2005 to stockholders of record as of October 31, 2005.

Investors Financial Services Corp. will broadcast a conference call, via the Internet, today, October 19, 2005 at 5:00 p.m. ET. The call will be accessible on the Company's home page at www.ibtco.com. The conference call will also be available via telephone at (719) 457-2679, confirmation code 6894360. Recorded replays of the conference call will be available on the website and by dialing (719) 457-0820, confirmation code 6894360.

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 middle office outsourcing, global custody, multicurrency accounting, and mutual fund administration, as well as ancillary services including foreign exchange, securities lending, cash management and investment advisory services. Offices are located in the United States, Canada, Cayman Islands, and Ireland. Visit Investors Financial Services Corp. 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, 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, sell its services to new and existing customers, and 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 June 30, 2005.

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

                     For the Nine Months Ended   For the Three Months Ended
                             September 30,              September 30,
                       -----------------------     -----------------------
                           2005        2004           2005        2004
                       ----------- -----------     ----------- -----------
Operating Revenue:
Asset servicing fees:
   Core service fees   $   274,150 $   231,485     $    95,447 $    76,636
   Ancillary service
    fees                    92,370      83,849          33,372      23,518
                       ----------- -----------     ----------- -----------
      Total asset
       servicing fees      366,520     315,334         128,819     100,154
Other operating income       2,424       1,515           1,013         418
Gain on sales of
 investments               11,123         234           1,383           -
                       ----------- -----------     ----------- -----------
      Total operating
       revenue             380,067     317,083         131,215     100,572
                       ----------- -----------     ----------- -----------

Interest income            320,670     223,250         114,512      80,474
Interest expense           192,970      84,487          76,471      32,207
                       ----------- -----------     ----------- -----------
   Net interest income     127,700     138,763          38,041      48,267
                       ----------- -----------     ----------- -----------
      Net operating
       revenue             507,767     455,846         169,256     148,839
                       ----------- -----------     ----------- -----------
Operating Expenses:
Compensation and
 benefits                  185,779     154,052          65,428      44,958
Technology and
 telecommunications         39,901      34,892          13,988      14,170
Transaction processing
 services                   35,252      30,766          12,476       9,628
Depreciation and
 amortization               23,724      24,388           7,740       7,667
Occupancy                   19,409      21,613           6,569       7,353
Professional fees            9,253      11,861           2,874       4,605
Travel and sales
 promotion                   4,823       3,940           1,649       1,361
Insurance                    3,284       3,499           1,009       1,139
Other operating expenses    12,734      10,314           4,397       3,610
                       ----------- -----------     ----------- -----------
   Total operating
    expenses               334,159     295,325         116,130      94,491
                       ----------- -----------     ----------- -----------

Income Before Income
 Taxes                     173,608     160,521          53,126      54,348

Provision for income
 taxes                      53,301      53,838          17,894      18,214
                       ----------- -----------     ----------- -----------
Net Income             $   120,307 $   106,683     $    35,232 $    36,134
                       =========== ===========     =========== ===========
Basic Earnings Per
 Share                 $      1.81 $      1.61     $      0.54 $      0.54
                       =========== ===========     =========== ===========
Diluted Earnings Per
 Share                 $      1.77 $      1.57     $      0.53 $      0.53
                       =========== ===========     =========== ===========


                                   Share Information (unaudited)

                     For the Nine Months Ended   For the Three Months Ended
                             September 30,               September 30,
                       -----------------------     -----------------------
                           2005        2004            2005        2004
                       ----------- -----------     ----------- -----------

Common stock
 outstanding            64,955,015  66,353,823      64,955,015  66,353,823
Weighted-average
 basic shares           66,530,636  66,084,620      66,076,656  66,298,749
Weighted-average
 diluted shares         67,966,493  67,853,624      67,010,888  68,130,862



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

                                    September 30,       December 31,
                                        2005                2004
                                    ------------        ------------
Assets
Cash and due from banks             $     67,246        $     49,059
Federal Funds sold                     1,000,000                   -
Securities held to maturity
 (approximate fair value of
 $6,850,689 and $5,937,462 at
 September 30, 2005 and December
 31 2004, respectively)                6,872,650           5,942,717
Securities available for sale          4,362,913           4,565,505
Nonmarketable equity securities           50,000              50,000
Loans, less allowance for loan
 losses of $100 at September 30,
 2005 and December 31, 2004              343,539             134,530
Accrued interest and fees
 receivable                              109,006              89,292
Equipment and leasehold
 improvements, less accumulated
 depreciation of  $57,285 and
 $61,017 at September 30, 2005
 and December 31, 2004,
 respectively                             64,683              67,883
Goodwill, net                             79,969              79,969
Other assets                             278,043             188,870
                                    ------------        ------------
Total Assets                        $ 13,228,049        $ 11,167,825
                                    ============        ============

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
   Demand                           $    324,471        $    690,308
   Savings                             5,617,054           4,448,405
   Time                                  271,997             257,669
                                    ------------        ------------
      Total deposits                   6,213,522           5,396,382

Securities sold under
 repurchase agreements                 5,273,406           4,255,497
Short-term and other
 borrowings                              645,032             594,681
Due to brokers for open
 trades payable                           57,216               5,475
Junior subordinated deferrable
 interest debentures                      24,774              24,774
Accrued taxes and other expenses          62,523              54,967
Other liabilities                        203,322             123,787
                                    ------------        ------------
      Total liabilities               12,479,795          10,455,563
                                    ------------        ------------

Commitments and contingencies                  -                   -


Stockholders' Equity:
Preferred stock, par value $0.01
 (shares authorized:  1,000,000;               -                   -
 issued and outstanding:  none at
 September 30, 2005 and December
 31, 2004)
Common stock, par value $0.01
 (shares authorized:  175,000,000;
 issued and outstanding:
 64,955,015 and 66,595,349 at
 September 30, 2005 and
 December 31, 2004, respectively)            671                 667
Surplus                                  283,835             272,536
Deferred compensation                       (245)               (572)
Retained earnings                        534,338             418,034
Accumulated other comprehensive
 income, net                               2,603              23,888
Treasury stock, at cost
 (2,124,669 shares at September
 30, 2005 and 73,235 at December
 31, 2004)                               (72,948)             (2,291)
                                    ------------        ------------
      Total stockholders' equity         748,254             712,262
                                    ------------        ------------
Total Liabilities and Stockholders'
 Equity                             $ 13,228,049        $ 11,167,825
                                    ============        ============

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

                       Three Months Ended          Three Months Ended
                       September 30, 2005          September 30, 2004
                       ------------------          ------------------
                    Average            Average  Average           Average
                    Balance Interest Yield/Cost Balance Interest Yield/Cost
                    ------- -------- ---------- ------- -------- ----------

Interest-earning
 assets:
  Federal funds
   sold and
   securities
   purchased
   under resale
   agreements    $    62,674 $    565    3.61% $    30,880 $   106   1.37%
                 ----------- --------          ----------- -------
  Investment
   securities(1)
   Mortgage-
    backed
    securities     8,254,384   80,937    3.92%   6,847,730  57,631   3.37%
  Federal agency
    securities     2,352,235   23,395    3.98%   2,132,992  13,216   2.48%
   State and
    political
    subdivisions     466,457    5,221    4.48%     508,218   5,778   4.55%
   Other
    securities       193,486    2,158    4.46%     300,114   2,597   3.46%
                 ----------- --------          ----------- -------
  Total investment
   securities     11,266,562  111,711    3.97%   9,789,054  79,222   3.24%
  Loans              241,692    2,236    3.70%     142,437   1,146   3.22%
                 ----------- --------          ----------- -------
   Total
    interest-
    earning
    assets        11,570,928  114,512    3.96%   9,962,371  80,474   3.23%
  Allowance for
   loan losses          (100)                         (100)
  Noninterest-
   earning assets    745,211                       540,500
                 -----------                   -----------

   Total
    assets       $12,316,039                   $10,502,771
                 ===========                   ===========

Interest-bearing
 liabilities:
  Deposits:
   Savings       $ 3,338,204 $ 19,718    2.36% $ 3,771,445 $12,803   1.36%
   Time               34,099      292    3.43%     130,169     466   1.43%
  Securities
   sold
   under
   repurchase
   agreements      5,513,285   40,344    2.93%   4,410,369  14,300   1.30%
  Junior
   subordinated
   debentures         24,774      605    9.77%      24,774     605   9.77%
  Other
   borrowings      1,756,104   15,512    3.53%   1,001,787   4,033   1.61%
                 ----------- --------          ----------- -------
  Total interest-
   bearing
   liabilities    10,666,466   76,471    2.87%   9,338,544  32,207   1.38%
                 ----------- --------          ----------- -------
Noninterest-
 bearing
 liabilities:
   Demand
    deposits         255,114                       182,992
   Savings            64,761                        40,640
   Noninterest-
    bearing time
    deposits         202,772                       143,641
   Other
    liabilities      352,242                       162,732
                 -----------                   -----------
  Total
   liabilities    11,541,355                     9,868,549
  Equity             774,684                       634,222
                 -----------                   -----------
  Total
   liabilities
   and equity    $12,316,039                   $10,502,771
                 ===========                   ===========
  Net interest
   income                    $ 38,041                      $48,267
                             ========                      =======
  Net interest
   margin (2)                            1.32%                       1.94%
                                       =======                     =======
  Average interest
   rate spread (3)                       1.09%                       1.85%
                                       =======                     =======
  Ratio of interest-
   earning assets
   to interest-
   bearing liabilities                 108.48%                     106.68%
                                       =======                     =======

(1) Average yield/cost on available for sale securities is based on
    amortized cost.
(2) Net interest income divided by total interest-earning assets.
(3) 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 Nine Months Ended   For the Three Months Ended
                            September 30,               September 30,
                     --------------------------  --------------------------
                           2005        2004         2005         2004
                         ---------   ----------   ---------    ---------
Core service fees:
   Custody, accounting
    and administration   $ 274,150   $ 231,485    $  95,447     $ 76,636

                         ---------   ---------    ---------    ---------
Ancillary service fees:
    Foreign exchange        41,050      42,334       15,546        9,326
    Cash management         25,956      19,587        9,419        7,249
    Securities lending      17,162       7,718        5,312        1,994
    Investment advisory      6,189      12,346        2,485        4,313
    Other service fees       2,013       1,864          610          636
                         ---------   ---------    ---------    ---------
         Total ancillary
          service fees      92,370      83,849       33,372       23,518
                         ---------   ---------    ---------    ---------
Total asset servicing
 fees                    $ 366,520   $ 315,334    $ 128,819    $ 100,154
                         =========   =========    =========    =========

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


                             For the                 For the
                         Nine Months Ended      Three Months Ended
                         September 30, 2005     September 30, 2005
                        --------------------   --------------------

Net assets processed,
 beginning of period         $ 1,430                $  1,496
                             -------                --------
Change in net assets
 processed:
  Sales to new clients           159                     157
  Further penetration of
   existing clients               38                      17
  Lost clients                   (11)                      -
  Fund flows and
   market gain                   118                      64
                             -------                --------
    Total change in net
     assets processed            304                     238
                             -------                --------
  Net assets processed,
   end of period             $ 1,734                $  1,734
                             =======                ========

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