year, the bank's annual report has revealed.

The bank was forced to absorb significant losses as a result of investment portfolio restructuring, the report said, that resulted in "one-time costs that reduced Bermuda-based interest earnings materially.'' In fact, partly as a result of those losses, the contribution to bottom line profits from Bermuda operations plunged to a five year low, after achieving a record high the year before.

But it came as contributions to the bottom line from overseas operations shot up dramatically. Of the bank's $48.7 million in net income for the year, some $40.6 million (83 percent) was the overseas contribution, more than twice as much as the year before.

The contribution from Bermuda operations, which included revenues derived from retail banking and international business done locally, was down to $8.1 million, just a quarter of the roughly $32 million contributed to bottom line profits from Bermuda operations last year.

However, the bank's assistant vice president, finance & planning, Alison Satasi, said: "Certainly the restructuring costs are a part of the reduction in the contribution from local operations, but you can't say that is the total of the impact on the income. You don't know how various investments with different strategies would have performed. It is not just the costs that are being taken out of that income. It is also the impact of different investment portfolios on ongoing interest earnings, which in itself is a massive number.

So you can't say that there would have been a significant impact on net income if this did not occur.'' The report explained: "Movements in interest rates for medium-term debt instruments were resulting in unacceptable volatility in market values.

"As a consequence, it was decided to shorten the maturity of the fixed rate portfolio by moving out of all medium-term US treasury instruments into 18-24 month securities.

"As a result of this decision and the sales of other instruments during the year, the bank incurred costs on disposal of securities of $56 million.

"This was mitigated by net gains on sales of related hedging instruments of $20 million and interest income, after transfer pricing, of $7 million.

"The restructuring actions sharply reduced treasury results for the year, but placed the bank on a firm base for building on the strength of its core business.'' Ms Satasi pointed out that the total restructuring costs amounted to $36 million, which resulted from the $56 million of costs, minus the $20 million in net gains from the hedging instruments.

The bank also reported: "Improved customer volumes and margins were more than offset by the cost of restructuring the bank's investment portfolio during the year. The duration of the fixed rate US government portfolio was shortened during the year, resulting in a decline of $23.8 million in net interest earnings.

"Interest earnings before the effect of debt provisions increased $3.3 million in Europe, largely reflecting volume and margin improvements in the Isle of Man and Luxembourg.

"Higher average volumes and margin improvements were the key reason for a $3.3 million improvement in net interest earnings in Hong Kong. Similarly, Cayman's interest income increased by just over $600,000.

"More than offsetting this was a decline of $34 million in Bermuda-based net interest earnings. Bad debt provisions improved $5.3 million as troubled loan situations declined in Bermuda and Guernsey.''