the bank, which pulled out of part of its UK business, can look forward to better times. Ahmed ElAmin reports.

After a tough year cleaning up the books, Bank of N.T. Butterfield and Son Ltd. president and chief executive officer Calum Johnston has set his sights on achieving record results for the current financial period.

Mr. Johnston has set a target return on equity (ROE) of more than 14 percent and a return on assets (ROA) of 0.66 percent for the financial year ending June 30, 1999.

Adjusting for expected growth in assets and equity that target translates into a projected record net income of between $36 to $37 million, Mr. Johnston told The Royal Gazette yesterday.

Before exceptional charges of about $32.5 million in the 1998 financial year the bank had net income of about $35 million, a record. Excluding discontinued operations the bank had a ROE of 10.3 percent and a ROA of 0.6 percent.

Comparable ROE for the prior financial year was 10.6 percent and ROA was 0.7 percent.

"We are not shooting for the moon,'' Mr. Johnston said. "I still want to make sure the books are clean. I would be very comfortable with $36 to $37 million based on what we figure for growth in assets.'' He said he was attempting this year to determine what a reasonable ROE would be for the bank based on targets set by others in the industry.

"It has been a rough, tough year for us as a group,'' he said. "We are pleased with where we are.'' Since he was appointed to the bank at the end of last year Mr. Johnston determined further write offs were needed for losses in closing its London Branch and exiting other business in the UK.

Under Mr. Johnston the bank took a further charge of $26.1 million in addition to the $16.8 million taken the previous year. Additional write offs of $6.4 million for other exceptional items brought net income for the year ended June 30 down to $2.5 million.

The decision to get out of parts of its UK business was made under Mr.

Johnston's predecessor John Tugwell, who resigned for personal reasons after about six months.

"The decision to close and exit these businesses was correct, but the execution was overly hasty,'' Mr. Johnston stated in his report to shareholders. "To secure the agreement of other banks to take over certain loans and to provide funding for a business we had sold, The Bank of N.T.

Butterfield & Son Limited gave guarantees. In anticipation of receiving calls on some of these guarantees we restructured certain exposures and provided for others, resulting in a further charge of $26.1 million.'' The annual report also revealed Mr. Johnston decided to keep Davenham Group Plc, which was purchased in 1996. The subsidiary was purchased in 1996 and provides specialised lending products to the corporate sector.

The company was originally going to be sold and it was listed last year as a discontinued business.

"Upon review, however, we have elected to retain it, as it is well managed, profitable and has an excellent reputation in its market,'' the annual report stated.

Davenham's revenue for fiscal 1998 was $4.9 million, up 32.4 percent from $3.7 million in 1997. Net income was about $870,000 compared to $820,000 the previous financial year.

The bank also has a corporate finance and institutional stockbroking operations in London, which reported a "small loss'' for the fiscal year.

In the breakdown of its other businesses, two asset management subsidiaries reported stellar results. The trust subsidiary had record net income of $3.3 million, a growth of 57 percent. The investment management subsidiary had record net income of $3.5 million, up 42 percent. Meanwhile corporate services net income was about $930,000, up marginally from the previous financial year.

Under treasury and capital markets the bank had net income of $11.4 million, a gain of 13.3 percent.

In the Bermuda operations the bank made write offs of about $4 million for "poorly designed accounting systems''. Another $2.4 million was written off for such items as outstanding goodwill, the book value of a redundant computer system and residual compensation of former executives. Another $2.4 million was taken for a change in the way post-retirement medical benefits are accounted for, as reported in a previous Royal Gazette story.

In its retail banking operations on the Island the bank had net income of about $1.6 million before provisions, and a loss of $5.2 million after provisions.

"Management is vigorously addressing the issue of expense control in Bermuda by seeking improvements to productivity and systems, while addressing customer service,'' the bank stated.

The bank's Grand Cayman operations reported net income of $15.5 million, up 22 percent from the year before. Guernsey had net income of $1.9 million, a gain of 19 percent. Hong Kong was "modestly profitable'' with net income of $500,000 compared with a loss of $700,000 the previous financial year.

Total revenue for fiscal year ended June 30 from the bank's continuing operations was $150.7 million, up 8.5 percent from the previous year.

During the year the bank strengthened its credit risk management team to prevent what happened in London from happening again. Total loans at June 30 was $1.16 billion, down from $1.25 billion the previous year.

"In the past, credit quality had been poor, and non-performing loans, particularly in London, have had a serious adverse effect on the group's performance,'' the bank stated. "...For all but the smallest credits, a clear separation of duties now exists between the officers recommending credit-related transactions and those who authorise them. Large credits are subject to review and authorisation by the Credit Committee, which brings to bear the experience and skill of several executive officers.'' Mr. Johnston chairs the committee. Loans in Bermuda make up about 80 percent of the lending portfolio.

AIMING HIGH -- Calum Johnston