Bank Of Bermuda Announces First Quarter 2003 Earnings

Edward H. Gomez, Chief Financial Officer, commented: "Given market conditions, this was a solid start to the financial year, with GAAP earnings per share up 30% from the previous quarter. Adjusted for the one-time insurance recovery, the consecutive quarter increase was 11%. Compared with a year ago, however, earnings were down as costs outpaced revenue growth, which continued to be restrained by an adverse economic climate. Total revenues of $107 million were moderately higher than last year, which demonstrates our success at adding new business in our target markets, despite the impact of weak equity markets and very low interest rates.

"Operating expenses were up from a year ago. This reflected higher insurance costs, continued investment in people and technology in areas of business growth, and the effect of currency movements on our European cost base. While headcount increases have been contained and largely restricted to areas of business growth, and we will continue to focus closely on costs, maintaining operating margins is expected to be an ongoing challenge throughout the year."

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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.

Chief Executive Officer, Henry B. Smith, added: "We must balance our commitment to managing our business for long-term growth with the need to deliver consistent earnings performance for our shareholders. That is a tall order in this difficult environment, but we believe we are meeting the challenge well. We are adding new, profitable business through growth in select target markets where we have a sustainable competitive advantage. This is augmenting our business base for long-term revenue growth. At the same time, we are being careful to restrict our investments in people and technology to areas that enhance our competitiveness and strategic positioning."

Quarter ended 31 March 2003 compared with Quarter Ended 31 March 2002

Total revenue was 2% higher at $107.1 million, compared with $105.4 million a year ago. Non-interest income of $66.7 million was $3 million or 5% higher and represented 62% of total revenues. Investment and other income were up $2.3 million to $3 million. The increases in non-interest and investment income were reduced by a $2.7 million fall in net interest income.

The largest portion of non-interest income, global fund services fees, were $31.8 million, up 3% from $31 million the first quarter of 2002. Increased fees in Europe and the Far East of $1.1 million and $0.5 million respectively were partly offset by a decrease of $0.8 million in North America. Growth in Europe was primarily generated by Bank of Bermuda's Dublin office, where global fund services fees were up more than $0.9 million from the same quarter last year and driven by the developing alternative fund business in that location. Growing pension fund assets under administration in Hong Kong continued to be the key driver of Far East global fund services fee growth. The change in North America fees is impacted by 2002 lost institutional business reported in previous quarters.

Private trust fees of $7.7 million were little changed, down 1% from the first quarter of 2002. Revenue from new fiduciary business was offset by the effect of a decline in the market value of client assets and the results of actions taken in 2002 to terminate less profitable relationships.

Investment Services fees fell 10% to $9.4 million. The combined average value of Bank of Bermuda's proprietary range of mutual funds was down slightly to $6.4 billion from $6.5 billion in the first quarter of 2002. Average assets in money and bond funds grew by 1% and 13% respectively, but this growth was offset by a more than 22% decline in higher-margin equity fund products.

Foreign Exchange earnings of $11.7 million were up 24% from $9.4 million a year earlier as market conditions enabled Bank of Bermuda to improve spreads on client foreign exchange activity, while volumes were little changed.

Banking Services fees were 15% higher at $6.1 million, from $5.3 million in the first quarter of 2002. The increase was due to improved results from card and other banking services, that more than offset lower fee income from lending and bank account services.

Net interest income was $40.2 million, which was $2.7 million or 6% lower than the year-ago quarter. This decline was the result of a reduction in net interest margin from 1.85% in the 2002 first quarter to 1.67% in the 2003 first quarter. Average interest earning assets were up from $9.4 billion to $9.8 billion, funded by an increase in demand customer deposits that more than offset a fall in term customer deposit balances. The decline in net interest margin was due to a reduction in the size of Bank of Bermuda's outsourced securities portfolio. The average outsourced securities portfolio size was reduced from $1.3 billion a year ago to $501 million in the current quarter. The proceeds from the disposal of securities in this portfolio were reinvested by Bank of Bermuda as part of its internally managed portfolios and in accordance with its usual policies. The outsourced securities portfolio includes longer-duration assets that generate a higher gross interest rate than the securities portfolios managed by Bank of Bermuda internally. Hedging instruments are used to reduce the outsourced securities portfolio duration to the Bank's target level and the change in value of those instruments is included in investment income as part of the portfolio mark-to-market adjustment. This accounting treatment, in accordance with generally accepted accounting standards, results in the total return on the outsourced securities portfolio being divided between interest earnings and investment income. Net of hedging costs and fees, the outsourced securities portfolio is expected to generate a superior return to the Bank's internally managed assets over the long term. The impact on interest income and net interest margin of a change in the size of the outsourced securities is greater than the net impact on performance, as interest income reflects only the higher gross interest yield and not the associated hedging and other costs.

Net provisions for loan losses were $0.8 million compared with a net recovery of $0.3 million in the comparative quarter. At 31 March 2003, impaired loans were $20.8 million, down from $22.7 million a year earlier, while total loans increased from $1.7 billion to $1.8 billion. The coverage ratio improved from 119% to 122%.

Investment losses on the trading portfolio were $2 million for the first quarter of 2003 and $2.2 million for the year-ago quarter. These amounts represent costs in the quarter for the net hedged position of Bank of Bermuda's outsourced securities portfolio. This portfolio is managed by a third party investment manager to enable 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. With an upward sloping yield curve, this portfolio strategy results in a higher yield on the longer-duration assets, which is partly offset by revaluation of the net hedged position. The outsourced portfolio continued to perform well in the first quarter, exceeding benchmark by 63bp and contributing $2.9 million to net income after hedging costs and management fees. Compared with the year-ago quarter, however, when the portfolio size was $1.3 billion and posted its best-ever performance of 119bp over benchmark, the current quarter's results had a comparative earnings impact of negative $0.18 per share.

Investment and other income was $3 million in the quarter, compared with $0.7 million last year, representing gains on sale of investments in mutual funds and realised gains on available for sale securities.

Operating expenses of $84 million compare with $76.6 million in the prior period. Salaries costs, the largest category of operating expenses, were $45.5 million for the first quarter of 2003. This compares with $45.2 million in the year-ago quarter when a $1.5 million restructuring charge in connection with Bank of Bermuda's Cayman office was included in salaries costs. Basic salaries increased by $3.8 million, partly offset by lower profit-related compensation accruals. The increase in basic salaries resulted from unfavourable foreign exchange movements that increased salary costs in Europe, a more experienced staff mix, annual salary increases and the addition of 50 staff during the past 12 months. Pension and staff benefits increased to $15.1 million, 17.1% higher than $12.9 million in the first quarter of 2002. This increase reflects the higher salary base and increased spending on training. Property costs increased by 5% to $7.1 million, primarily due to the impact of adverse exchange rate movements on European premises costs. Systems and communications expenses increased to $10.7 million, up $1.4 million, from the prior year. Corporate, marketing and other expenses increased by $3.1 million to $5.6 million. The current and year ago quarter were impacted by amounts recovered from insurers in connection with litigation of $3.5 million and $5.4 million respectively. The remaining increase in corporate, marketing and other costs resulted from a $1.9 million additional insurance cost as cover was re-negotiated in a very hard market following the expiration of a three-year program.

Income tax expense was $1.5 million. This was down $0.6 million due to lower taxable net income in Hong Kong and Guernsey.