The Bank of Bermuda yesterday reported more than $20 million in net income for the second quarter of this year, despite the continued challenges of operating in a poor interest rate environment.

The bank's results for the quarter ended June 30, 2003 - at $20.6 million - were marginally higher than the Bank's net income for the same period last year which stood at $20.4 million. However, the numbers were down by $1 million from the $21.6 million in net income earned in the first quarter of 2003. Bank CEO Henry Smith pinned the company's profitability in large part on its level of customer service and growth of its client base: “We continue to strengthen our core businesses by investing in technology focused on our clients' needs and augmenting our relationship management teams and other client-facing staff.

“Our success at continuing to build our client base over a prolonged period of weak financial markets has provided a firm foundation for revenue growth as markets recover. Nevertheless, the current environment continues to present us with challenges. Our interest earnings will remain depressed as long as the sustained low interest rate environment persists and, as a small but global organisation, achieving operating efficiencies is a significant challenge. Despite the operating climate, our discipline and close client focus have delivered sound results.”

Broken down on a per share basis - the bank is listed on both the Bermuda Stock Exchange and as of last year, on the Nasdaq - the Bank reported earnings of 71 cents per share, on a diluted basis, in comparison to 65 cents per share for the same period last year.

Looking at income levels, the bank's coffers from noninterest income stood at $71.9 million for the quarter, a gain over the previous year's $66.8 million. On the net interest income front however, which the bank calculates after loan losses, the bank's numbers were down from the previous year's second quarter results - $39.5 million in 2003 compared to $44.2 million in 2002.

Meanwhile, the bank reported an increase during the second quarter in its net provisions for loan losses which stood at $1.3 million compared to a net release of $0.3 million in the second quarter of 2002.

The bank said this year's charge in the second quarter reflected a slight deterioration in local loans combined with general provisions for a growing loan portfolio.

Impaired loans were more or less on par quarter to quarter with a reported $22.8 million recorded during the last quarter compared to $22.6 million during the same period last year. In total, the bank's loan portfolio increased over the past year to $2 billion from $1.7 billion which it said was a reflection of its plan to “carefully grow” in that area.

Company chief financial officer Edward Gomez said last quarter's numbers reflected a record eight percent growth in the bank's noninterest income compared to a year ago. “Noninterest income was up eight percent from a year ago, and at a record level. This demonstrates the value of our diversified revenue lines, as interest earnings continue to be challenged. Our largest business, Global Fund Services, generated both record fees and assets under administration as it continued to win new clients and the value of its existing clients' assets benefited from market increases.

Foreign exchange earnings were also up sharply on the strength of higher volumes and volatility.” “The very low interest rates continue to limit our opportunities to improve margins on the reinvestment of our clients' deposits. The decline in interest earnings from the year-ago quarter, however, is primarily due to a smaller outsourced trading portfolio in the current quarter. We reduced the size of this portfolio in late 2002 to improve earnings stability as, although the portfolio has outperformed our internally-managed assets over the long-term, its quarter-to-quarter performance can vary.”

On the expense side, the Bank of Bermuda saw a $6.8 million increase - up to $90.7 million from $83.9 million in the same quarter of 2002 - in its operating costs which it attributed in part to a stronger euro pushing up payroll costs in its European offices. In addition the company said it had also been hit by higher insurance costs which had increased by $2.7 million in comparison to the same quarter last year.Mr. Gomez said: “With respect to operating costs, we continue to look for opportunities to improve efficiency and streamline our support activities as we invest in technology and face increased corporate overhead, such as insurance. “Our total headcount at June 30 was unchanged from a year earlier as additions in client-facing areas were offset by savings in support functions.”

The Bank of Bermuda's quarterly conference call with CEO Henry Smith will take place at 10am (Bermuda time) today and can be accessed by telephone on 973 317 5319 or via the Internet at www.bankofbermuda.com/investorrelations/webcast.htm.