Bank of Bermuda Announces Fourth Quarter 2002 Results

Diluted earnings per share for the 2002 full year were $2.53, up 32% from 2001 full year diluted earnings per share of $1.91. Non-core charges in 2001, the most significant of which was net cost of $34.1 million to settle litigation, reduced 2001 full-year earnings by $1.44 per diluted share and 2001 fourth quarter results by $0.52 per diluted share. In 2002, non-core items resulted in a net credit of $0.03 per diluted share and included a further insurance recovery related to the prior year litigation settlement. There were no non-core items in the 2002 fourth quarter.

Edward H. Gomez, Chief Financial Officer, had the following comments: "2002 was another year of market declines and low interest rates, conditions that put pressure on our revenue lines. We nevertheless continued to build quality revenue streams that delivered solid results to our bottom line. New business wins more than compensated for the down-draft of weak equity markets, and fee revenues for the year were a record $264.3 million and 63% of our total revenue base. At the same time we kept a tight rein on discretionary costs, while holding our global staff levels steady, which both protected our margins and maintained our ability to take on new business."

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* Bank of Bermuda's results are stated in U.S. Dollars and in accordance with U.S. Generally Accepted Accounting Principles.

Mr. Gomez continued: "A quarter ago we talked about our outsourced trading portfolio, and indicated that we would be reducing its size in order to improve earnings stability in the face of continued market volatility. That has now been accomplished; portfolio size was reduced from $1.3 billion to $500 million in three steps over the course of the quarter to minimise market disruption. Margin compression and lower average balances adversely affected interest earnings both in the quarter and throughout 2002. Our asset base is liquid and short duration, in order to match the characteristics of our deposit base, with a substantial portion of our assets in capital efficient securities of OECD financial institutions and governments. This conservative investment strategy and the risk averse structure of our balance sheet will make net interest margins an ongoing challenge in this climate of very low interest rates."

Chief Executive Officer, Henry B. Smith, added: "Although the environment continues to present significant challenges, Bank of Bermuda starts 2003 a stronger institution. We have added new clients and strengthened relationships with important intermediaries; we have delivered important new technology for our clients; we have built on our position in markets where we believe we have compelling opportunities; and we have further enhanced our compliance and corporate governance functions. We are also seeing signs that the current economic uncertainty strengthens our appeal and competitive positioning as a quality provider in well-regarded jurisdictions. Our goal for 2003 is to build on this strengthened base with disciplined business growth in key markets, delivered by an efficient, highly-skilled and relationship-focused organisation."

Quarter ended 31 December 2002 compared with Quarter ended 31 December 2001

Total revenue was 12% higher at $109.3 million, compared with $97.4 million for the year-ago quarter. The increase was the result of a $14.3 million improvement in investment and other income. Net interest income of $43.7 million was down 4% from $46.4 million in the 2001 fourth quarter. Non-interest income of $67.1 million was little changed from a year ago and represented 61% of total revenue.

Global Fund Services fees were $30.8 million and unchanged from a year ago. Growth in GFS fees in Europe, up $700 thousand, and the Far East, up $1.3 million, were offset by a $2 million decline in the Americas, which was the result of a market-related fall in the value of client assets in the prior quarter. The increase in the Far East, continues to be driven largely by a growing pension fund business. In Europe, the Dublin office, which is focused on the alternative fund industry is the primary source of fee revenue growth.

Private Trust fees of $7.2 million were also flat with the year-ago quarter. While Bank of Bermuda continues to add new fiduciary business, revenue from new business has been offset by the weakness in client asset values and the results of the Bank's work to terminate less profitable relationships.

Investment Services fees were down 7% at $9.9 million. A reduction in client trading volumes, which produced lower execution fees, and a decline in volumes in higher margin investment products were drivers of the fee decrease. Assets in Bank of Bermuda's range of mutual funds totalled $6.4 billion at 31 December 2002 and $6.3 billion at 31 December 2001. The Corporate Money Fund was up $256 million, and this was partially offset by declines in the Global Money Fund, down $108 million and in other fund products of $97 million.

Foreign Exchange earnings of $11.6 million were up 7% from the same quarter in 2001. Although transaction volumes were slightly lower, wider spreads generated an overall increase. Banking fees were $5.9 million in the quarter, compared with $6.7 million a year ago, due largely to costs associated with discontinuing a credit card incentive program.

Other non-interest income of $1.8 million, up from $1.4 million in the 2001 fourth quarter, represents the release into income of unclaimed balances that are more than 6 years old.

Net interest income was $43.7 million, $2.7 million, or 6%, lower than the comparative quarter. The decline was mainly the result of a fall in average interest earning assets, which were 4% lower at $9.4 billion, producing a $1.8 million drop in interest earnings. The remaining decline was due to margin compression, the net interest margin fell from 1.87% in the 2001 fourth quarter to 1.84% in the current period. Bank of Bermuda has suffered margin compression in the current very low interest rate environment as spreads are reduced on the reinvestment of deposits that hit interest rate floors, as well as on the investment of shareholders' equity. Partly mitigating this spread compression in reported net interest earnings, is the impact of a larger average outsourced securities portfolio. This portfolio includes longer duration assets and averaged $1.1 billion in the current quarter, compared with $0.9 billion a year earlier. This portfolio generated a gross yield, before the effect of hedging instruments included as part of investment income, of 3.81%.

Bank of Bermuda's outsourced securities portfolio is accounted for on a marked-to-market basis. Realised and unrealised losses on the portfolio totaled $3.1 million in the 2002 fourth quarter and $5.7 million in the 2001 fourth quarter. This portfolio is managed by a third party investment manager in accordance with strict duration and quality guidelines, and has an average credit quality of triple-A. The use of an independent investment manager enables Bank of Bermuda to improve asset diversification by investing in securities for which it does not have in-house expertise, notably mortgage products and asset-backed securities, which

represent approximately 80% of the portfolio. These assets tend to be of longer-duration than the Bank's target level, and the overall portfolio duration is reduced accordingly using interest rate swaps and futures. Because the portfolio is marked-to-market, movements in fair value are recognised in earnings as they occur. With an upward sloping yield curve, this portfolio strategy results in a higher yield on the longer-duration assets, which is included in interest-earnings, being reduced by a loss on revaluation of the related hedging instruments, which is accounted for as an investment loss.

Investment and other income, excluding the marked-to-market portfolio, was a gain of $1.6 million, compared with a loss of $10.1 million in the year-ago quarter. The current quarter's gain was realised on sale of a Bermuda-based privately held investment holding company. In the year ago quarter, investment losses included a $7.9 million change in the carrying value of a company that provided risk analysis services.

Operating expenses of $92.5 million compare with $95 million in the comparative quarter. The year-ago quarter's operating expenses included non-core items totaling $7.9 million. Excluding these items, operating expenses were 6% higher than a year ago, driven by increased salaries and staff-related costs. Fourth quarter 2001 salaries included non-core items that reduced expense by $4.4 million, after adjusting for these non-core items year ago salary costs were $44.1 million and the fourth quarter 2002 expenses of $47.0 million represents a 7% increase. The increase was mostly the result of a more expensive staff complement as Bank of Bermuda added more experienced client-facing staff, contributing to an increase in total salary costs. Fourth quarter 2001 pension and staff benefits were $10.8 million, but $14.1 million before a one-time credit from termination of a Bermuda defined benefit plan. The $3.2 million increase to $17.2 million in the current quarter was the result of the higher salary base in the current year, as well as a $2.1 million actuarially determined charge to compensate a UK defined benefit plan for below expectation pension fund asset performance. Fourth quarter 2002 property expenses were $7.3 million, down slightly, while systems and

communications costs were up $1 million to $11.2 million. Corporate, marketing and other costs in the year-ago quarter included $14.6 million of non-core items, mostly related to the costs to settle litigation. This expense category would have been $11.8 million without these items, compared with $9.7 million in the current quarter.

Income tax was $168 thousand, compared with $1 million for the December 2001 quarter, reflecting the release of some tax losses brought forward from prior years in Hong Kong.

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Forward Looking Statements

This media release may be deemed to include forward looking statements in that they do not relate strictly to historical facts. These statements often use words such as "anticipate", "expect", "intend", "believe", "prospects", "plan", "goal", "may", or other words of similar meaning. These statements may relate to our future plans, objectives and results and represent only our belief regarding these matters, which, by their very nature, are inherently uncertain and outside our control. Such forward looking statements speak only as of the date they are made and involve certain risks and uncertainties, including worldwide economic conditions; volatility and fluctuations in securities markets, foreign exchange rates, and interest rates; inflation; changes in savings rates and investment behavior; changing pension requirements in target markets; government regulations, including banking regulations; local economic conditions; and competition in the geographic and business areas in which we conduct our operations. These, and other, risks and uncertainties could cause actual results to differ materially from those indicated by forward looking statements. Bank of Bermuda's 2001 Annual Report includes additional information about factors that could affect actual results in the section entitled "Forward Looking Statements".

Notes to Editors

The Bank's results are stated in accordance with generally accepted accounting principles in the United States.

Bank of Bermuda

Bank of Bermuda is an international financial institution that provides banking, trust, asset management, fund administration and global custody services to its corporate, private and retail clients. Founded in 1889, its global headquarters are in Bermuda, and it has offices or subsidiaries in the Cayman Islands, Cook Islands, Dublin, Guernsey, Hong Kong, Isle of Man, Jersey, Luxembourg, New York, New Zealand, and Singapore. It has representative offices in Bahrain and London.

The Bank is a publicly-traded corporation, listed on the Bermuda Stock Exchange (BOB) and Nasdaq (BBDA).

Further information on Bank of Bermuda is located on the Internet at www.bankofbermuda.com.

FOURTH QUARTER 2002 CONFERENCE CALL NOTICE:

The Bank of Bermuda Limited will host a broadcast of its fourth quarter earnings conference call on Wednesday, January 22, 2003 at 9:00 a.m. (ET). The call will be accessible on Bank of Bermuda's Investor Relations home page, at www.bankofbermuda.com/investorrelations/webcast.htm and by toll-free telephone in the U.S. at (800)-915-4836 and by toll from outside the U.S. at (973)-317-5319.

A recorded replay of the earnings conference call will be available on the Bank's web site beginning at 12:00 p.m. (EST) that day.

For more information please contact:

Alison J. Satasi, Head of Investor Relations

Bank of Bermuda

Telephone: (441) 299-6851

Facsimile: (441) 299-6559

E-mail: Investor_Relations@BankofBermuda.com