The Bank of Bermuda reported a 25 percent decline in its quarterly operating earnings yesterday, sending the company's stock price into a spin on the Nasdaq and the Bermuda Stock Exchange.

The Island's largest bank said its operating earnings, which do not account for one-time expenses like law suit settlements, were $20.39 million for the period between April 1 and June 30 this year. During the same period last year, operating earnings were $27.02 million.

Bank of Bermuda stock closed at $30.75 on the Nasdaq yesterday, down 8.94 percent. The price on the BSX quickly followed, falling seven percent to $33.

The bank attributed the figures to low interest rates and weak stock markets. "Clearly, we continue to be challenged by economic conditions," Henry B. Smith, the bank's chief executive, said in a statement.

Yesterday's announcement marked the fifth consecutive quarter of year-over-year decline in results. Last year, when second quarter results were announced, the bank said it was in a difficult period and adversely affected by low interest rates, which affect revenue generated by loans, and weak markets. Since then, the Federal Reserve has cut interest rates by two points and the S&P 500 stock index has fallen to five-year lows.

But this year, the bank's results have new implications because, since April 23, it has been traded on the Nasdaq, where shares trade more frequently and investors pay greater attention to results.

Last July, when the Bank of Bermuda announced an albeit smaller decline in operating income, the share price fell a mere half-point to $50.50 on the Bermuda Stock Exchange (BSX). Anne Kast, the president of Kast Investment Management explained that announcements about companies listed on the BSX "come and go with no reaction".

"Stock trading on the Bermuda Stock Exchange is much more benign than it is in America, which is a much more liquid market," Ms Kast said. "Things that didn't have a big impact in the past will have a much bigger impact." She added that relative to the BSX, American markets have much more stringent reporting requirements for listed companies. The bank announced its earnings before trading began and the stock price opened at $33.02 on the Nasdaq, 75 cents below Friday's closing price. The price hit a low of $29.45 shortly after 11 a.m. before rebounding somewhat to the $30.75 closing price, after 63,300 shares were traded.

The volatile market, suffering from accounting scandals and WorldCom's recent bankruptcy filing, didn't help.

But investors also appeared unimpressed by the bank's improved bottom line. Although last year's second quarter operating results were stronger than this year's, that period's net earnings were much lower after the bank paid $29.5 million to settle a class action litigation in the US related to Cash 4 Titles, a pyramid scheme operated by some of the bank's employees in the Cayman Islands which lost investors money. During the most recent quarter, the bank settled two more lawsuits related to Cash 4 Titles - one in the US and another in the Cayman Islands - but earnings were not affected because the bank had already set aside money for the settlements.

According to yesterday's release, as of June 30 there was no outstanding Cash 4 Titles litigation against the bank.

During the most recent quarter, the bank also managed to cut its operating expenses by four percent, mostly because of lower consulting and legal fees. The earnings release said the bank "continues to closely control discretionary spending".

But cost-cutting measures could not make up for weakening revenues, which declined 9 percent since last year.

Interest income, which accounted for 41 percent of the bank's revenue for the quarter, fell because lower lending levels and interest rates.

The bank said interest-earning assets - which include mortgages - fell from $10.5 billion to $9.5 billion between the second quarter of 2001 and the second quarter of 2002.

The interest margin, which reflects the difference between the rate the bank charges for lending money and the interest rate it pays on savings accounts, fell from 1.91 percent to 1.85 percent. Excluding a $1.1 million recover of interest on a particular non-performing loan, the net interest margin for the quarter was 1.8 percent.

The bank's $1.3 billion trading portfolio produced a $6.7 million loss, compared with a $900,000 loss a year ago.

A six percent rise in fee income buffered the decline in interest income and increasing investment losses. Global Funds Services, the bank's largest business, reported a growth in fee revenue as new business offset the effect of declining stock markets. Of the $2.7 million increase in that business's revenue, $1.6 million was generated by operations in the Far East.

Assets in the Bank of Bermuda's mutual funds rose $800 million to $6.3 billion between June 30, 2001 and June 30, 2002, which helped produce a five percent increase in investment services fees.

The bank's foreign exchange earnings also grew due to a more volatile currency market.

The bank will hold a conference call at 11 a.m. today to discuss the results.