Despite low interest rates and faltering stock markets, the Bank of N.T. Butterfield's net income from core operations increased 7.5 percent during 2002, the bank said yesterday.

Net income for the year ended June 30 was $65.3 million, of which $870,000 was earned from discontinued operations. Including the $17.01 million sale of the bank's 80 percent stake in a Hong Kong subsidiary, total annual income was $82.29 million.

The bank said income during the fourth quarter, which includes the sale of the Hong Kong subsidiary, was $30.89 million.

"This was a year that was both challenging and profitable," Alan Thompson, the bank's president and chief executive officer, said in a release issued yesterday.

Mr. Thompson said his company was "not totally immune" to declining interest rates, which affected earnings of Cayman and UK subsidiaries.

Like its main competitor, Bank of Bermuda, the Bank of Butterfield reported lower interest earnings, which declined three percent from last year's figures.

Indicating the economic woes of the bank's two primary markets, Bermuda and the Cayman Islands, non-performing loans increased more than two and a half times from $9.54 million to $24.8 million although the bank expects to recoup most of the principal and interest of those loans.

The bad news was offset by a 19.1 percent increase in noninterest income, which represents 52.9 percent of the bank's total revenue. The bank saw "notable" increases in earnings from trust and executorship fees, corporate services and foreign exchange.

Assets under investment management increased year on year by $804 million to $6.52 million. The money invested in Butterfield's mutual funds increased 20.6 percent.

But along with increased revenue came increased expenses, which rose from $124.75 million in 2001 to $142.17 million in 2002. The bank attributed the increase to the acquisition of CIBC's Guernsey business in July of last year. Expenses related to Bermuda operations increased 3.4 percent, partly because of employee-related costs.

The bank will pay a 35 cent dividend on August 22 to shareholders of record on August 14. The dividend is three cents higher than it was in the third quarter, and brings the total annual dividend to $1.28 per share, 21.9 percent higher than last year.

The earnings report did not affect the bank's share price on the Bermuda Stock Exchange yesterday - only 1,720 shares changed hands at $33 apiece, the same price they closed at on Friday.