Investors Financial Services Corp. Announces 2004 Diluted Earnings Per

    Business Editors

    BOSTON--(BUSINESS WIRE)--Jan. 25, 2005--Investors Financial Services Corp. (Nasdaq: IFIN) reported diluted earnings per share of $2.09 for the year ended December 31, 2004, an increase of 50% from $1.39 in 2003. Net income for the year ended December 31, 2004 was $142.0 million, up 54% from $92.4 million in 2003. For the fourth quarter of 2004, diluted earnings per share grew 11% to $0.52 from $0.47 for same period in 2003. Net income for the fourth quarter was $35.3 million, up 13% from $31.2 million in the fourth quarter of 2003.
    For the year ended December 31, 2004, diluted operating earnings per share increased 39% to $2.09 per share from $1.50 per share in 2003 and net operating income increased 43% to $142.0 million from $99.6 million in 2003. Diluted operating earnings per share and net operating income for 2003 are presented on a non-GAAP basis, which excludes the impact of a retroactive change in Massachusetts tax law enacted during 2003 as described below in this press release.
    Kevin J. Sheehan, Chairman and Chief Executive Officer, commented, "Investors Financial Services delivered another year of outstanding results during 2004. Sizeable wins from new and existing clients and the leverage inherent in our business model continue to drive our impressive performance. We remain confident in our ability to produce growth of 25% in diluted earnings per share in 2005."
    Diluted earnings per share and net income for the year ended December 31, 2003 include a $7.2 million charge, net of federal income tax benefit, that resulted from a retroactive change in Massachusetts tax law enacted in the first quarter of 2003 and the Company's subsequent settlement of the resulting tax assessment with the Massachusetts Department of Revenue. The change in tax law disallowed a dividends received deduction taken by Investors Bank & Trust Company on dividends it had received since 1999 from a wholly-owned real estate investment trust. In the second quarter of 2003, the Company settled this disputed tax issue, agreeing to pay 50% of the liability, resulting in the $7.2 million charge, net of federal income tax benefit.
    This press release includes both an income statement based on GAAP and a non-GAAP operating income statement that excludes the $7.2 million charge described above. Management believes that operating earnings per share and net operating income, which exclude the charge, present a more useful depiction of the Company's actual results of operations because they exclude the effect of a one-time change in tax law that is unrelated to the Company's ongoing operations. Excluding the $7.2 million charge, the Company recorded net operating income for the year ended December 31, 2003 of $99.6 million and diluted operating earnings per share of $1.50.
    Net operating revenue for the year ended December 31, 2004 grew 25% to $613.2 million from $490.1 million in 2003. Revenue from core services such as global custody, multicurrency accounting and mutual fund administration rose to $314.3 million for the year ended December 31, 2004, up 24% from $254.2 million in the prior year. Revenue from ancillary services including foreign exchange, securities lending, cash management, and investment advisory services increased to $108.9 million for the year ended December 31, 2004, up 37% from $79.4 million in 2003. Net interest income grew 22% to $187.7 million for the year ended December 31, 2004 from $153.9 million in 2003. Operating expenses were $398.4 million in 2004, up 16% from $344.9 million in 2003.
    Net operating revenue for the fourth quarter grew 19% to $157.3 million from $131.7 million for the same period in 2003. Revenue from core services such as global custody, multicurrency accounting and mutual fund administration rose to $82.8 million for the fourth quarter, up 18% from $70.1 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 $25.1 million for the quarter, up 21% from $20.8 million in the fourth quarter of 2003. Net interest income grew 22% to $48.9 million for the fourth quarter of 2004 from $40.1 million for the same period in 2003. Operating expenses were $103.1 million for the fourth quarter of 2004, up 19% from $86.3 million for the same period in 2003.
    Assets processed for clients totaled approximately $1.43 trillion at December 31, 2004, up 15% from $1.24 trillion at September 30, 2004 and up 35% from $1.06 trillion at December 31, 2003.
    Today the Company also announced that its Board of Directors declared an increase in the cash dividend on its common stock from $0.0175 per share to $0.02 per share. The dividend is payable February 15, 2005 to stockholders of record as of January 31, 2005.
    Investors Financial will broadcast a conference call, via the Internet, today, January 25, 2005 at 5:00 p.m. ET. The call will be accessible on Investors Financial's home page at http://www.ibtco.com. The conference call will also be available via telephone at (719) 457-2679, confirmation code 294343. Recorded replays of the conference call will be available at www.ibtco.com or by dialing (719) 457-0820, confirmation code 294343.
    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 ancillary 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 http://www.ibtco.com.
    This news release contains forward-looking statements (statements that are not historical facts). These statements, such as the Company's statements regarding its ability to grow diluted earnings per share for the year ending December 31, 2005 are based upon assumptions and estimates that might not be realized and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Such risks and uncertainties include the performance of global financial markets, changes in interest rates, changes in the relationship between long-term and short-term interest rates, regulatory actions affecting the Company's clients, the Company's ability to manage the conversion of new business, and the Company's ability to continue to manage its costs, including the costs of compliance with increasing regulatory requirements. 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 Form 10-Q for the quarter ended September 30, 2004 and in the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2003.

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

For the Three For the Year Ended Months Ended December 31, December 31, 2004 2003 2004 2003 --------- --------- -------- -------- Operating Revenue: Asset servicing fees: Core service fees $314,272 $254,225 $82,787 $70,074 Ancillary service fees 108,928 79,361 25,079 20,844 --------- --------- -------- -------- Total asset servicing fees 423,200 333,586 107,866 90,918 --------- --------- -------- -------- Other operating income 2,057 2,607 542 743 --------- --------- -------- -------- Gain on sale of investment 234 - - - --------- --------- -------- -------- Total operating revenue 425,491 336,193 108,408 91,661 --------- --------- -------- --------

Interest income 313,149 247,094 89,899 64,987 Interest expense 125,469 93,180 40,982 24,903 --------- --------- -------- -------- Net interest income 187,680 153,914 48,917 40,084 --------- --------- -------- -------- Net operating revenue 613,171 490,107 157,325 131,745 --------- --------- -------- -------- Operating Expenses: Compensation and benefits 205,728 186,932 51,676 43,623 Technology and telecommunications 49,816 38,914 14,924 9,894 Transaction processing services 42,159 33,299 11,393 9,675 Depreciation and amortization 32,124 27,971 7,736 7,738 Occupancy 29,032 29,218 7,419 7,398 Professional fees 15,346 11,189 3,485 2,299 Travel and sales promotion 5,470 4,822 1,530 1,507 Insurance 4,625 3,203 1,126 1,199 Other operating expenses 14,083 9,373 3,769 2,976 --------- --------- -------- -------- Total operating expenses 398,383 344,921 103,058 86,309 --------- --------- -------- --------

Income Before Income Taxes 214,788 145,186 54,267 45,436

Provision for income taxes 72,826 52,765 18,988 14,264 --------- --------- -------- -------- Net Income $141,962 $92,421 $35,279 $31,172 ========= ========= ======== ======== Basic Earnings Per Share $2.15 $1.42 $0.54 $0.48 ========= ========= ======== ======== Diluted Earnings Per Share $2.09 $1.39 $0.52 $0.47 ========= ========= ======== ========

Share Information (unaudited)

For the Year For the Three Months Ended Ended December 31, December 31, ----------------------- ----------------------- 2004 2003 2004 2003 ----------- ----------- ----------- -----------

Common stock outstanding 66,595,349 65,436,788 66,595,349 65,436,788 Weighted-average basic shares 66,179,286 65,098,960 66,461,316 65,306,548 Weighted-average diluted shares 67,916,217 66,475,462 68,106,442 66,909,373

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

December December 31, 31, 2004 2003 ------------ -----------

Assets Cash and due from banks $49,059 $39,689 Securities held to maturity (approximate fair value of $5,937,462 and $4,308,578 at December 31 2004 and 2003, respectively) 5,942,717 4,306,216 Securities available for sale 4,565,505 4,296,637 Nonmarketable equity securities 50,000 50,000 Loans, less allowance for loan losses of $100 at December 31, 2004 and 2003 134,530 199,530 Accrued interest and fees receivable 89,292 72,816 Equipment and leasehold improvements, less accumulated depreciation of $61,017 and $47,683 at December 31, 2004 and 2003, respectively 67,883 76,420 Goodwill, net 79,969 79,969 Other assets 188,565 101,901 ------------ ----------- Total Assets $11,167,520 $9,223,178 ============ ===========

Liabilities and Stockholders' Equity Liabilities: Deposits: Demand $690,308 $334,823 Savings 4,448,405 3,682,295 Time 257,669 190,000 ------------ ----------- Total deposits 5,396,382 4,207,118

Securities sold under repurchase agreements 4,255,497 3,258,001 Short-term and other borrowings 594,681 1,098,087 Due to brokers for open trades payable 5,475 - Junior subordinated deferrable interest debentures 24,774 24,774 Accrued taxes and other expenses 52,767 52,222 Other liabilities 123,787 42,719 ------------ ----------- Total liabilities 10,453,363 8,682,921 ------------ -----------

Commitments and contingencies - -

Stockholders' Equity: Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and outstanding: none in, 2004 and 2003) - - Common stock, par value $0.01 (shares authorized: 175,000,000 and 100,000,000 in 2004 and 2003, respectively; issued and outstanding: 66,595,349 and 65,436,788 in 2004 and 2003, respectively) 667 655 Surplus 272,536 242,662 Deferred compensation (572) (1,076) Retained earnings 418,034 280,701 Accumulated other comprehensive income, net 25,783 17,865 Treasury stock, at cost (73,235 and 26,508 shares in 2004 and 2003, respectively) (2,291) (550) ------------ ----------- Total stockholders' equity 714,157 540,257 ------------ ----------- Total Liabilities and Stockholders' Equity $11,167,520 $9,223,178 ============ ===========

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

Three Months Ended December 31, 2004 -------------------------------- Average Average Balance Interest Yield/Cost ------------ -------- ----------

Interest-earning assets: Federal funds sold and securities purchased under resale agreements $51,326 $247 1.92% Investment securities (1) 10,218,542 88,364 3.46% Loans 158,160 1,288 3.26% ------------ -------- Total interest-earning assets 10,428,028 89,899 3.45% ------------ -------- Allowance for loan losses (100) Noninterest-earning assets 563,545 ------------ Total assets $10,991,473 ============ Interest-bearing liabilities: Deposits: Savings $3,921,057 $14,622 1.49% Time 112,741 557 1.98% Securities sold under repurchase agreements 4,776,215 20,990 1.76% Junior subordinated debentures 24,774 605 9.77% Other borrowings(2) 796,934 4,208 2.11% ------------ -------- Total interest-bearing liabilities 9,631,721 40,982 1.70% ------------ -------- Noninterest-bearing liabilities: Demand deposits 247,971 Savings 93,825 Noninterest-bearing time deposits 143,370 Other liabilities 184,858 ------------ Total liabilities 10,301,745 Equity 689,728 ------------ Total liabilities and equity $10,991,473 ============ Net interest income $48,917 ======== Net interest margin (3) 1.88% ==========

Average interest rate spread (4) 1.75% ========== Ratio of interest- earning assets to interest-bearing liabilities 108.27% ==========

Three Months Ended December 31, 2003 -------------------------------- Average Average Balance Interest Yield/Cost ----------- -------- -----------

Interest-earning assets: Federal funds sold and securities purchased under resale agreements $27,043 $67 0.99% Investment securities (1) 8,176,007 63,993 3.13% Loans 146,730 927 2.53% ----------- -------- Total interest-earning assets 8,349,780 64,987 3.11% ----------- -------- Allowance for loan losses (100) Noninterest-earning assets 496,607 ----------- Total assets $8,846,287 =========== Interest-bearing liabilities: Deposits: Savings $3,419,895 $11,112 1.30% Time 4,696 9 0.77% Securities sold under repurchase agreements 3,269,592 6,986 0.85% Junior subordinated debentures 24,774 605 9.77% Other borrowings(2) 965,579 6,191 2.56% ----------- -------- Total interest-bearing liabilities 7,684,536 24,903 1.30% ----------- -------- Noninterest-bearing liabilities: Demand deposits 273,129 Savings 124,416 Noninterest-bearing time deposits 127,065 Other liabilities 115,926 ----------- Total liabilities 8,325,072 Equity 521,215 ----------- Total liabilities and equity $8,846,287 =========== Net interest income $40,084 ======== Net interest margin (3) 1.92% ===========

Average interest rate spread (4) 1.81% =========== Ratio of interest- earning assets to interest-bearing liabilities 108.66% ===========

(1) Average yield/cost on available for sale securities is based on amortized cost.

(2) Interest expense for the three months ended December 31, 2003 includes a contractual prepayment penalty of $2.0 million for the prepayment of certain FHLBB borrowings.

(3) Net interest income divided by total interest-earning assets.

(4) 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 Three Year Ended Months Ended December 31, December 31, ------------------- ------------------ 2004 2003 2004 2003 --------- --------- --------- -------- Core service fees: Custody, accounting and administration $314,272 $254,225 $82,787 $70,074 --------- --------- --------- --------

Ancillary service fees: Foreign exchange 54,466 36,501 12,132 10,517 Cash management 26,396 20,884 6,809 5,097 Investment advisory 15,020 11,777 2,674 2,886 Securities lending 10,385 8,903 2,667 1,985 Other service fees 2,661 1,296 797 359 --------- --------- --------- -------- Total ancillary service fees 108,928 79,361 25,079 20,844 --------- --------- --------- --------

Total asset servicing fees $423,200 $333,586 $107,866 $90,918 ========= ========= ========= ========

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

For the For the Three Year Months Ended Ended Ended December 31, December 31, 2004 2004 ------------- -------------

Net assets processed, beginning of period $1,057 $1,243 ------------- ------------- Change in net assets processed: Sales to new clients 54 50 Further penetration of existing clients 37 15 Lost clients (3) (1) Fund flows and market gain 285 123 ------------- ------------- Total change in net assets processed 373 187 ------------- ------------- Net assets processed, end of period $1,430 $1,430 ============= =============

Investors Financial Services Corp. (Dollars in thousands) GAAP Earnings (unaudited) For the For the Three Year Ended Months Ended December 31, December 31, ------------------- ----------------- 2004 2003 2004 2003 --------- --------- -------- --------

Income before taxes $214,788 $145,186 $54,267 $45,436 Provision for income taxes 72,826 52,765 18,988 14,264 --------- --------- -------- -------- Net income $141,962 $92,421 $35,279 $31,172 ========= ========= ======== ======== Earnings per share: Basic $2.15 $1.42 $0.54 $0.48 ========= ========= ======== ========

Diluted $2.09 $1.39 $0.52 $0.47 ========= ========= ======== ========

Non-GAAP Operating Earnings (unaudited)

For the For the Three Year Ended Months Ended December 31, December 31, ------------------- ----------------- 2004 2003 2004 2003 --------- --------- -------- --------

Income before taxes $214,788 $145,186 $54,267 $45,436 Provision for income taxes 72,826 45,565(1) 18,988 14,264 --------- --------- -------- -------- Net income $141,962 $99,621 $35,279 $31,172 ========= ========= ======== ======== Earnings per share: Basic $2.15 $1.53 $0.54 $0.48 ========= ========= ======== ========

Diluted $2.09 $1.50 $0.52 $0.47 ========= ========= ======== ========

(1) Provision for income taxes for the year ended December 31, 2003 excludes a $7.2 million charge, net of federal income tax benefit, related to a retroactive change in Massachusetts tax law enacted in the first quarter of 2003 and the Company's subsequent settlement of the resulting tax assessment with the Massachusetts Department of Revenue. The effect of the exclusion is an increase of $0.11 per basic and diluted share.

--30--DC/bo*

CONTACT: Investors Financial Services Corp. John N. Spinney, Jr. 617-937-3500 john.spinney@ibtco.com

KEYWORD: MASSACHUSETTS INDUSTRY KEYWORD: BANKING EARNINGS SOURCE: Investors Financial Services Corp.

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