Bank of Butterfield saw its profits soar in real terms by over 40 percent during the second quarter of 2003, the Island's oldest bank reported yesterday - despite record low interest rates and depressed stock markets around the world.

The bank, which was established in 1858, reported second quarter net income of $19.9 million, an increase of $6.0, million or 43.2 percent year-on year - not taking into account a gain last year of $17 million from the sale of subsidiaries in Hong Kong.

This $19.9 million also represents an increase of $3.5 million, or 21.2 percent, over the previous quarter.

"We continue to be pleased with the enhancement in shareholder value achieved by the bank during a period that has again seen declines in interest rates and weak global financial markets," said Alan Thompson, president and chief executive officer of the bank.

"The strategy of focusing on our core business model is clearly having the desired effect. Particularly noteworthy is the achievement of a 22.7 percent return on equity for the quarter, up from 19.3 percent the previous quarter. We will continue to build on our strengths to produce long term sustainable and profitable growth."

Earnings per share for the second quarter were $1.07 per share, up 19 cents on the first quarter, the bank said in a release yesterday.

Richard Ferrett, executive vice president and chief financial officer, said: "It is especially pleasing to note that second quarter net interest income is up year on year by $4.8 million, or 20.7 percent, despite the challenges of declining world interest rates.

"This reflects both the success of our asset/liability management strategies and the increase in our customer deposit base. Non interest income was also up by $1.1 million, or 3.8 percent, on the first quarter and $3.0 million, or 10.8 percent, on the like quarter a year ago when excluding last year's one-off gain from the sale of the Hong Kong subsidiaries."

He added that in contrast, operating expenses decreased year on year by $0.1 million, or 0.2 percent.

This reflected "continuing focus on controlling costs", he said.

The bank also said its board approved a one-for-ten bonus share issue, which equates to a 10 percent stock dividend, effective 5 August 2003, in addition to maintaining the cash dividend at 35 cents per share. The cash dividend is payable on 22 August to shareholders of record on 5 August 2003.

The company's net interest income before credit related provisions, was reported at $29.1 million, up year on year by $4.7 million, or 19.4 percent, "despite the impact of the low interest rate environment, reflecting balance sheet growth and asset/liability management strategies".

During the quarter the bank made $0.9 million of provisions in respect of credit losses, compared to $1.0 million a year ago. The net interest margin for the quarter was 1.9 percent compared to 1.3 percent a year ago.

Total fees and other income stood at $30.9 million an increase year on year of 10.8 percent, excluding last year's $17.0 million one-off gain.

"This reflects in particular strong growth in revenues from investment and pension fund administration (up 22.1 percent) and banking services (up 12.1 percent).

Total expenses decreased year on year by $0.1 million to $39.1 million, reflecting a reduction in non-personnel related expenses. The bank's total headcount at 30 June 2003 was down year on year by 17 to 1,212. The efficiency ratio for the quarter was 64.2 percent compared to 73.8 percent for the same quarter a year ago.

Earnings from core business activities in Bermuda increased year on year despite the low interest rate and global stock market conditions.

Net income from community banking was $10.3 million compared to $5.4 million a year ago. The wealth management and fiduciary services and investment and pension fund administration businesses achieved net income of $4.4 million, up 38.4 percent year on year.

Overseas, the Cayman operation recorded net income of $5.8 million, up year on year by $1.2 million, or 26.0 percent. Total income was up 7.4 percent year on year, to $12.0 million, reflecting growth in net interest income driven by an increase in the customer deposit base.

In Guernsey, total income increased by $1.0 million, or 17.4 percent despite global stock market and interest rate conditions. However, net income was down year on year by $0.5 million to $0.6 million, primarily due to the receipt a year ago of corporation tax credits in respect of the amalgamations of the bank's Guernsey businesses.

In the UK, Butterfield Private Bank increased total income by 25.7 percent to $1.1 million but this was offset by a planned increase in operating expenses as part of the bank's strategy to invest in the development of this business and as a result a small after tax loss of $0.3 million was recorded, the bank said.