Bank of Bermuda Announces Fourth Quarter Results

For the full year 2001, diluted earnings per share from core operations(1) were $3.38, compared with $3.99 in the prior year. On a U.S. GAAP basis, full year diluted earnings per share were $1.91, compared with $3.77 a year earlier.

Edward H. Gomez, Chief Financial Officer, commented: "This quarter closed a challenging year for Bank of Bermuda. While our core businesses performed well given the difficult economic backdrop and core operating results are strong, we took a prudent stance in providing for potential remaining litigation costs and investment valuation provisions in the fourth quarter. We provided an amount of $10 million for remaining potential liabilities and expenses in connection with the Cash 4 Titles litigation. We also recorded net investment expense of $15.8 million in the quarter, largely reflecting provisions against declines in investment valuations.

Mr. Gomez continued, "The above one-time items detracted from our core business performance. Fee revenues of $67.5 million in the fourth quarter were a record. Our largest business, Global Fund Services, was the primary driver generating 15.5% growth on robust new business. This is a significant achievement in the current environment and demonstrates our firm base for future growth. We believe that the strength of our core businesses will be more clearly visible in the 2002 financial year."

Chief Executive Officer, Henry B. Smith, added: "We have finished the year in a strengthened position to deliver improved value and sustained growth for our shareholders. While we faced particular challenges in the current year, we also built on our fundamental strengths in providing highly specialised services to global clients. Bank of Bermuda's specialised approach to client service enables us to support the innovative product and investment strategies demanded in today's market and provides a firm foundation for continued growth. The quality of our service also remains a core strength. This was particularly evident in 2001 as we delivered seamless service to our clients in times of considerable global uncertainty, particularly in the aftermath of September 11th. I remain extremely proud of the people in this organisation and their professionalism and energy. I am also delighted to announce that we have been successful in our application for a Dublin banking licence, as we consider our growing Dublin presence to be a key building block in our European strategy. We view the future with confidence that we will continue to build upon the strengths of our core businesses, concentrating on areas where our skills and industry knowledge provide exceptional service to our valued customers."

Fourth Quarter Financial Results

Quarter Ended 31 December 2001 compared with Quarter Ended 31 December 2000

Total revenue was $97.4 million, compared with $105.8 million in the year-ago quarter. Excluding investment and other income, core operating revenue was $113.2 million, slightly lower than $114.8 million in the prior year. 60% of total core operating revenue was comprised of non-interest income, which at $67.5 million was a record and up $2.6 million from a year earlier.

Global Fund Services (GFS) was the driver of fee revenue growth, increasing 15.5% to $30.8 million from $26.7 million a year ago. GFS fees represented 46% of total non-interest income for the December 2001 quarter. All geographic regions reported growth due to new business activity that compensated for the effect of market declines on the value of existing client assets. Consistent with previous quarters, the Far East contributed a significant portion of the increase as revenues from Mandatory Provident Funds, which became effective at the beginning of the year, continued to climb. Both revenues and client assets from these Hong Kong retirement schemes are exceeding expectations. Other geographic regions benefited from sustained strength of new flows into alternative investment vehicles, such as hedge funds and fund of funds vehicles, key segments of our client base. In particular, the Bermuda office reported higher global fund services fees of $1.8 million and Dublin, a focus for new business development, was up $0.7 million, a 34% increase.

Private trust fees were $7.2 million, down from $8.1 million a year earlier reflecting lower client asset values due to weakened equity markets and a strategic repositioning of the business by exiting lower value relationships in order to focus on higher value and more profitable fiduciary business. This strategy resulted in some short-term revenue reduction that will be replaced by recent new business wins.

Investment services fees of $10.6 million were down slightly from last year but 9% higher than the third quarter as increased proprietary mutual fund revenues more than offset a decline in brokerage fees due to reduced client trading volumes. Increased liquidity and an inflow of capital into the Bermuda insurance market were a significant source of new funds for the Corporate Money Fund, which was up $1.3 billion from a year earlier. In total, assets in Bank of Bermuda's range of mutual fund products were $6.3 billion at 31 December 2001, compared with $5.2 billion in the prior year.

Foreign exchange earnings of $10.8 million for the December 2001 quarter were $1.7 million less than a year earlier, when earnings were particularly strong during a period of heightened volumes due to stock market volatility. Banking services fees of $6.7 million were up 4%.

Net interest income was $46.4 million, down from $52 million, as sustained interest rate cuts eroded margins on the reinvestment of free and low interest-bearing deposits. The net interest margin fell to 1.87% from 2.11% in the year-ago quarter. Bank of Bermuda has maintained a short, matched-duration balance sheet, which provides market value stability but does not protect from margin erosion in the event of extreme interest rate reductions. Interest-earning assets averaged $9.8 billion in the quarter, compared with $9.9 billion a year ago.

Investment and other income was a net loss of $15.8 million for the quarter. $7.9 million of this total relates to changes in the carrying value of an investment in a company that provides risk analysis services. This was a strategic investment to enhance the suite of products offered to our clients. However, in light of the company's recent financial deterioration, we provided for a decline in value of this investment in accordance with best accounting practice. In addition, a decline in value of $5.7 million of our marked to market portfolio of debt instruments has been reflected in the net loss. For the year as a whole, the portfolio performed above our benchmark.

Operating expenses of $85.4 million were up 5.4% from the comparative period. This figure is stated net of a one-time credit of $4.1 million following the final actuarial valuation and settlement of liabilities related to the terminated defined benefit pension plan. Operating expenses in the quarter also include $2.4 million relating to staff, property and consulting costs in connection with a new subsidiary formed in the early part of the year to evaluate e-commerce initiatives. The Bank is discussing a sale of this company with potential acquirers and is expensing all costs as incurred. Excluding these non-core items , operating expenses were $87 million compared with $81 million last year. The largest component of operating expenses is salaries, which were up $3.5 million due to additional headcount in areas of business growth and the impact of annual salary increases, partly offset by reduced profit-related compensation accruals. Excluding non-core items pension and staff benefits were $0.5 million higher than a year ago, property expenses were $0.3 million higher, systems and communications expenses were up $1.3 million and corporate, marketing and other expenses were unchanged.

Income taxes for the quarter of $1 million were unchanged from a year earlier.

Bank of Bermuda provided an additional amount of $10 million in the quarter to cover potential liabilities and expenses associated with the Cash 4 Titles litigation. The Bank also recorded a net reduction of $3.9 million in insurance receivables in connection with this action. The Bank is engaged in discussions with certain of its insurance underwriters in an attempt to secure additional coverage.

Net income from core operations(1) was $25.1 million, compared with $32.8 million last year. Net income in accordance with U.S. GAAP was $1.4 million, compared with $23.7 million in the December 2000 quarter.

Balance Sheet

Total balance sheet assets at 31 December 2001 were $10.8 billion compared with $11.4 billion a year earlier. Investments in marketable securities were $5.5 billion, up from $4.7 billion last year. Cash and deposits of $3.6 billion were down from $4.8 billion consistent with Bank of Bermuda's policy to decrease its redeposit assets in favour of quality debt instruments with a higher yield. Loans, less allowance for loan losses, of $1.5 billion were unchanged from the prior year.

Total shareholders' equity was $629 million at the reporting date compared with $626 million last year.