Bank Of Butterfield Reports Second Quarter Earnings Of $19.9 Million

Reflecting the Group's continuing strong earnings performance and commitment to enhancing shareholder value the Board has approved a one-for-ten bonus share issue, which equates to a 10% 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.

Alan Thompson, President & Chief Executive Officer said, "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. The strategy of focusing on our core business model is clearly having the desired effect. Particularly noteworthy is the achievement of a 22.7% Return on Equity for the quarter, up from 19.3% the previous quarter. We will continue to build on our strengths to produce long term sustainable and profitable growth."

Richard Ferrett, Executive Vice President & Chief Financial Officer stated, "It is especially pleasing to note that second quarter net interest income is up year on year by $4.8 million, or 20.7%, 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%, on the first quarter and $3.0 million, or 10.8%, on the like quarter a year ago when excluding last year's one-off gain from the sale of the Hong Kong subsidiaries. In contrast, operating expenses decreased year on year by $0.1 million, or 0.2%, reflecting continuing focus on controlling costs."

Financial Highlights for the Quarter ending 30 June 2003 compared with the Quarter ending 30 June 2002.

· Net interest income before credit related provisions, at $29.1 million, is up year on year by $4.7 million, or 19.4%, 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% compared to 1.3% a year ago.

· Total fees and other income, at $30.9 million, increased year on year by 10.8%, excluding last year's $17.0 million one off gain.. This reflects in particular strong growth in revenues from investment and pension fund administration (+22.1%) and banking services (+12.1%).

· Total expenses decreased year on year by $0.1 million to $39.1 million, reflecting a reduction in non-personnel related expenses. The Group'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% compared to 73.8% for the same quarter a year ago.

· Earnings from our 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 & Fiduciary Services and Investment & Pension Fund Administration businesses achieved net income of $4.4 million, up 38.4% 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%. Total income was up 7.4% 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%, despite global stock market and interest rate conditions. However, net income was down year on year by $0.5 million to $0.6 million. This was primarily due to the receipt a year ago of corporation tax credits in respect of the amalgamations of our Guernsey businesses.

· In the UK, Butterfield Private Bank increased total income by 25.7% to $1.1 million. This was offset by a planned increase in operating expenses as part of our strategy to invest in the development of this business. As a result a small after tax loss of $0.3 million was recorded.

· Total assets as at 30 June 2003 were $6.7 billion compared to $5.7 billion a year ago. The increase reflects the growth in total assets of our Community Banking business in Bermuda, which were up year on year by $586 million. In addition, Cayman's total assets were up year on year by $401 million. These increases reflect a growing customer deposit base, which has increased year on year by $879 million, or 18.4%, to $5.7 billion. The Group's balance sheet remains highly liquid with a loans to customer deposits ratio of 31.1%.

· The Return on Assets for the quarter was 1.3% compared to 1.1% last year.

· Total loans increased year on year by $68 million, or 4.0%, reflecting increased loan demand in both Bermuda and Cayman. The loan portfolio, at $1.8 billion, represents 26.3% of total assets, compared to 29.6% a year ago. Non-accrual loans totaled $22.9 million as at 30 June 2003, down from $24.9 million a year ago and represent 1.3% of the loan portfolio. Loan provisions totalled $23.6 million at 30 June 2003, representing 1.3% of the portfolio.

· Total investments increased year on year by $302 million (16.5%) to $2.1 billion, which represents 31.9% of total assets. This reflects the Bank's asset/liability management strategy of investing in high quality investment grade securities as an alternative to the inter-bank deposit market. As at 30 June 2003 the Bank's investments, which are primarily carried at cost or amortised cost, had a net positive unrealised gain of $4.1 million. In addition, there was a net positive unrealised gain on the interest swap portfolio, which is also part of our asset/liability management strategies, of $18.2 million.

· The Bank issued US$125 million of subordinated lower tier II capital notes in the quarter under review by way of private placement with US institutional investors, the Bank's first such transaction in the US private placement market. The US$75 million issue of subordinated notes made in June 1998 was repaid on 1 July 2003, subsequent to the quarter-end.

· Shareholders' equity increased year on year by 8.3% to $363.0 million, reflecting the increase in retained earnings less share buybacks. The loan to the Stock Option Trust decreased by $5.4 million year on year, due to the exercise of stock options. The Bank has purchased for the Stock Option Trust 9.3% of the total shares in issue, at a cost of $34.7 million, to satisfy its current and future obligations under the Directors' and Executive Officers' and Employee Stock Option Plans. In addition, during the quarter under review the Bank bought back and cancelled 52,273 shares, at a cost of $1.7 million, under the Share Repurchase Programme.

· Assets under Investment Management increased year on year by 7.4% to $7.0 billion and Assets under Administration rose by 12.0% to $50.1 billion.