Edward H. Gomez, Chief Financial Officer, commented: "The economic climate continues to present us with difficult conditions. The weak equity markets challenge both asset-based and transaction-driven revenues, while very low interest rates continue to dampen interest earnings. Revenues before investment income were 2% down from the same quarter last year due to lower net interest earnings. However, the quarter's results also reflect some positive underlying trends. Fee revenues were up 6% from a year ago as we continue to see demand for our services and augment our client base. Our largest business, Global Fund Services, reported another quarter of fee revenue growth as new business more than offset the effect of stock market declines. We are maintaining our tight discipline over discretionary spending and achieved a 4% reduction in core operating expenses from a year ago. Our trading portfolio, which is accounted for on a mark-to-market basis, incurred a loss in the quarter that was partly offset by higher interest income as the yield curve steepened. This portfolio continues to perform above benchmark on both a year-to-date and since-inception basis."
Chief Executive Officer, Henry B. Smith, added: "Given the very demanding operating environment, the increase in fee revenue in the quarter is a particular achievement and indicates a sound foundation. Clearly, we continue to be challenged by economic conditions. Nonetheless, we are maintaining our focus on improving our infrastructure and building our core businesses."
Quarter ended 30 June 2002 compared with Quarter ended 30 June 2001
Total operating revenues for the quarter were $106.1 million, compared with $116.5 million for second quarter 2001. Non-interest income was $66.8 million, up 6% from a year ago, and represented 63% of total operating revenues.
Global Fund Services fees, the largest component of non-interest income, were $32.2 million, compared with $29.5 million a year earlier. All geographic regions generated growth with the most notable rise in the Far East, which generated $1.6 million of the increase, driven largely by strong growth in Mandatory Provident Fund assets. New business from our target alternative fund market led to net revenue increases in New York, Dublin and Luxembourg.
Private trust fees were $7.8 million for the quarter, down 2% from the second quarter of 2001, due to weakness in client asset values. Investment services fees were 5% higher than the year-ago quarter at $10.6 million as a result of the continued growth of the All-Points Corporate Money Fund, partly reduced by lower execution services fees. Assets in Bank of Bermuda's range of mutual fund products totalled $6.3 billion at 30 June 2002, compared with $5.5 billion at 30 June 2001.
Foreign exchange earnings, at $10.5 million for the quarter, were 8% higher than $9.7 million for the 2001 second quarter due to higher volumes during a period of increased currency volatility. Banking services fees of $5.9 million were unchanged from a year earlier.
Net interest income for the second quarter was $43.9 million, down 13% or $6.4 million from last year as a result of reductions in both volumes and margins. Interest-earning assets averaged $9.5 billion for the June 2002 quarter, compared with $10.5 billion a year ago, mainly due to lower term liabilities in overseas offices. The net interest margin for the quarter of 1.85% was down from 1.91% in the 2001 second quarter, reflecting the impact of the extreme low interest rate environment on margins earned on the reinvestment of free and low interest-bearing balances. Second quarter 2002 interest income included a $1.1 million recovery of accumulated unaccrued interest on a non-performing loan. After excluding this recovery, the net interest margin for the quarter was 1.80%.
Realised and unrealised losses on the trading portfolio totalled $6.7 million in the June 2002 quarter and $0.9 million in the June 2001 quarter. Bank of Bermuda's trading portfolio totalled $1.3 billion at 30 June 2002. This portfolio has an average credit quality of Aaa/AAA and is managed by a third party investment manager in accordance with strict portfolio duration and quality guidelines. This portfolio holds some longer duration assets that are managed to a very short duration using interest rate swaps and futures contracts. The portfolio is accounted for on a mark-to-market basis and all changes in fair value are recognised in earnings as they occur. During the current quarter, changes in the yield curve led to higher interest income and a loss on revaluation of the related hedging instruments. Over the period since inception and year-to-date, the portfolio has produced returns in excess of its performance benchmark. Investment income for the second quarter on the available for sale portfolio was $1.7 million, compared with $4.3 million a year ago.
Operating expenses were $83.9 million, down 4% from core operating expenses a year ago of $87.8 million. Second quarter 2001 core operating expenses excluded a credit of $2.3 million relating to recovery of losses on our credit card processing business and expenses of $2.5 million relating to start-up costs on a cancelled business venture. The reduction in core operating expenses was due largely to lower consulting and legal fees compared with the year ago quarter. Bank of Bermuda continues to closely control discretionary spending while investing as necessary in key resources, most notably people and systems, needed to remain competitive.
In the June 2001 quarter, U.S. GAAP results included a net amount of $29.5 million to reflect the cost to the Bank of the preliminary approved court settlement of the U.S. Cash 4 Titles class action litigation. In 2002, the Bank settled the pending civil action in the Cayman Islands relating to Cash 4 Titles. As well, in the June 2002 quarter, the Bank settled an action brought in the U.S. federal court by investors that purported to opt-out of the previously announced settlement of the U.S. class action. The second quarter settlement was covered by amounts previously provided and there was no resulting net charge or credit in the period. As at June 30, 2002, there was no outstanding litigation relating to Cash 4 Titles involving the Bank or its subsidiaries.
In the June 2002 quarter, Bank of Bermuda purchased 350,900 shares as part of its authorised stock buy-back programme, which permits the repurchase of up to 2.5 million shares.