Butterfield Bank Reports Second Quarter Earnings of $21.8 Million And Announces Bonus Share Issue

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 2004, in addition to maintaining the cash dividend at 38 cents per share. The cash dividend is payable on 23 August 2004 to shareholders of record on 5 August 2004. The bonus shares will be eligible for dividends commencing November 2004.

Alan Thompson, President and Chief Executive Officer said, "These results demonstrate that our business model continues to be successful in a highly competitive environment. The acquisition of Leopold Joseph during the quarter is entirely consistent with our stated group strategy of growing our business in the UK and Guernsey markets and its integration with our existing businesses is fully in line with expectations."

Richard Ferrett, Executive Vice President & Chief Financial Officer, commenting on the Bank's financial performance, stated that: "It is particularly pleasing to note that net income for the quarter from our Bermuda and Cayman businesses increased year on year by 14.3% and 17.6% respectively, reflecting strong growth across all business lines. In addition, for the fifth consecutive quarter the Group's Return on Equity exceeded 20%, at 20.9%."

Financial Highlights of the Quarter ending 30 June 2004 compared to the Quarter ending 30 June 2003 were:

· Net interest income before provisions for credit losses was $36.2 million, up year on year by $7.1 million, or 24.5%. This reflects both the growth in customer deposits and loans resulting from the acquisitions in Barbados and The Bahamas in the second half of 2003 and the United Kingdom in the second quarter of 2004, and organic growth across the Bank's established businesses. Provisions for credit losses in the quarter were $0.6 million, down from $0.9 million a year earlier. Non-accrual loans at 30 June 2004 totalled $20.5 million, down from $22.9 million a year ago, and represent 0.9% of total loans. Total provisions stood at $25.5 million at quarter end, including general provisions of $21.1 million, providing 124.4% coverage of non-accrual loans. The net interest margin for the quarter, at 1.9%, was up 0.1% on a year ago.

· Total fees and other income increased year on year by 33.3%, or $10.3 million, to $41.3 million, also reflecting the acquisitions. The quarter evidenced strong revenue increases from investment and pension fund administration (+55.6%), trust and investment services (+41.9%), asset management (+40.5%), customer related foreign exchange income (+34.1%), and banking fees (+24.7%). The Bank recognises loan and letters of credit origination fees over the life of the underlying transaction to which they relate. In the second quarter, $0.6 million of such fees were deferred bringing the total amount of deferred fees for the year to date to $1.7 million. The average life over which the fees will be recognised in the income statement is seven years.

· Total operating expenses were up year on year by $15.8 million to $54.8 million. Operating expenses for the acquired companies accounted for $9.7 million, or 61.7%, of the year on year increase, in line with expectations. The remainder of the increase primarily relates to higher employee related costs, reflecting an increase in headcount in Bermuda and Cayman due to business growth and the increasing cost of healthcare in Bermuda. The Group's total headcount has increased year on year from 1,212 at 30 June 2003 to 1,575 at the end of the quarter, in part reflecting the addition of 285 employees through the acquisitions.

· Net income from the Bank's Bermuda based businesses increased by $1.9 million, or 14.3%, to $15.3 million, reflecting significant business growth in the retail and corporate banking, asset management, trust and investment services, and investment and pension fund administration businesses. The Bermuda based loan portfolio increased year on year by $182.5 million, or 13.5%, to $1.54 billion, demonstrating the success of the Bank's community banking model in both the corporate and residential mortgage sectors.

· Overseas, Cayman recorded net income of $6.8 million, up 17.6% compared to a year ago. Total income increased by 17.7% to $14.1 million. The improvement reflects solid growth in the community banking and investment and pension fund administration areas. Total assets as at 30 June 2004 were $2.08 billion, up year on year by $472 million, the increase driven by growth in customer deposits.

· In Guernsey net income of $0.65 million was up 11.7% year on year and includes the contribution of Leopold Joseph's business in Guernsey, which is in the course of being amalgamated with Butterfield's existing businesses. Total income was up year on year by 29.4% to $9.5 million. At the end of the quarter the Guernsey operations were successfully relocated into one new prestigious building in St. Peter Port.

· In the UK a post tax loss of $1.3 million was recorded. Of this amount, $0.6 million relates to the cost of servicing debt capital injected into Butterfield Private Bank by the parent to facilitate the acquisition of Leopold Joseph on 2 April 2004. The acquisition reflects the Bank's commitment to the private banking and wealth management businesses in the UK and the process of amalgamating Butterfield's and Leopold Joseph's UK businesses is proceeding as planned.

· In The Bahamas total income increased by 6.5% over the preceding quarter, reflecting the acquisition in February 2004 of Deerfield Fund Services Limited, now renamed Butterfield Fund Services (Bahamas) Limited. Net income of $0.1 million was achieved.

· In its second full quarter since acquisition, Butterfield Bank in Barbados increased total income by 14.4% to $2.2 million over the preceding quarter. Net income of $0.1 million was recorded.

· The Group's Return on Equity for the second quarter was 20.9% compared to 22.7% at the same stage last year and 20.2% the preceding quarter when excluding the $5.8 million one-off gain recorded in that period.

· Earnings per share increased year on year by 8 cents, or 8.2%, to $1.05.

· The Return on Assets for the quarter was 1.1%, compared to 1.2% a year ago, the decrease reflecting the significant year on year growth in the balance sheet.

· Total assets as at 30 June 2004 were $8.04 billion, up from $6.69 billion a year ago. Some 82.2%, or $1.11 billion, of the growth was due to the acquisitions in The Bahamas ($60 million), Barbados ($154 million) and the United Kingdom and Guernsey re Leopold Joseph ($895 million).

· Customer deposits across the Group increased year on year by $1.31 billion, or 23.1%, to $6.98 billion, in line with the growth in total assets. Of that increase $0.97 billion, or 74.2%, was due to the acquisitions, with the remainder of the growth principally in Cayman.

· Total loans increased year on year by $576 million (32.6%), of which $334 million, or 57.9%, was from the acquisitions. In addition to the loan growth achieved by the Community Banking, Bermuda, division, solid loan growth was also seen in Cayman, up 15.9%, and from Butterfield Private Bank in the UK, up 25.0%. The balance sheet continues to remain highly liquid with the loan portfolio, at $2.34 billion, representing 29.1% of total assets, compared to 26.4% a year ago. Customer loans as a percentage of customer deposits now stand at 33.6%, compared to 31.1% at the same stage a year ago.

· Total investments increased year on year by $479 million, or 22.4%, to $2.61 billion, reflecting the employment of the increase in customer deposits and the asset/liability management strategy of investing in high quality investment grade securities as an alternative to the inter-bank deposit market. Investments represent 32.5% of total assets, compared to 31.9% a year ago.

· Shareholders' equity increased year on year by 16.9% to $424.3 million, reflecting the increase in retained earnings less share buybacks. The loan to the Stock Option Trust decreased by $5.8 million to $28.8 million, due to the exercise of stock options by directors and employees. During the quarter under review the Bank bought back and cancelled 81,750 shares, at a cost of $3.6 million, under the Share Repurchase Programme.

· Client assets under investment management increased year on year by $1.5 billion, or 21.3%, to $8.5 billion. The acquisition of Leopold Joseph accounted for 45.1% of the increase with the remainder reflecting growth in Bermuda, Cayman and Guernsey.

· Client assets under administration increased by $18.8 billion, or 37.6%, to $68.9 billion compared to a year ago, reflecting growth in Bermuda, Cayman and Guernsey and the acquisitions made in The Bahamas.