international expansion and improve productivity, the financial institution said in its latest annual report.

The moves are part of a strategy to generate a higher rate of return for shareholders.

The bank, whose 1996 profit slipped to $29 million from $31.3 million, has targeted "an after tax return on equity of 15 percent'', bank chairman Sir David Gibbons and president Michael Collier said jointly in the annual report.

"This we would hope to do in three years,'' they said.

Return on equity (ROE) is a ratio reflecting profitability. Return on assets (ROA), is another.

For the Bank of Butterfield, these two ratios are at, or very close to, their lowest levels in a decade.

ROE is calculated by dividing a company's net worth at the beginning of the accounting period into net income for the period, after preferred stock dividends but before common stock dividends. ROA is net income divided by total assets.

For the year ended June 30, 1996, the bank's ROE was 10.7 percent compared to 12.6 percent a year earlier.

The last time shareholders enjoyed a 15 percent ROE was from fiscal 1992.

For 1996, ROA was .70 percent compared to .76 percent a year earlier.

Part of the strategy to generate a higher return was a significant head office reorganisation designed to reduce corporate administrative costs. As well as the head office executive changes, the bank is proposing cutting its board size from 24 to 16. That move is on the Bank of Butterfield's October 28 AGM agenda.

In 1996, the bank strengthened internal controls by audit restructuring and appointing a head of group compliance. The bank also appointed a new head of financial risk management to co-ordinate the bank's risk profile.

The bank deliberately phased out what it called "marginally profitable corporate lending relationships'', particularly in the UK.

On the lending front, the bank decreased its loan book $141.7 million, or 10.2 percent, to $1.25 billion, over the year.

In Bermuda, lending was down by $9.7 million to $892.1 million while in Europe lending was decreased by $125.6 million. Lending was also decreased in Hong Kong.

At year end, the total of "nonperforming'' loans was $38.2 million. A non-performing loan is one not paying principal or interest. After 90 days without payment, a loan is said to be nonperforming.

The bank also said reserve for credit losses at June 30 was $15.7 million, up from $12 million a year earlier.

The bank increased credit loss reserves to $3.6 million for $1.6 million.

Total write-offs for the year were just over $1.2 million, compared to $695,862 a year earlier.

Although the annual report highlights a significant shift in strategy, the bank's balance sheet remains highly liquid, reflecting a low loans to total assets ratio.

Liquidity at year end, as calculated by the ratio of deposits with banks to customer deposits, was 61.4 percent, similar to the 62.9 percent for the prior year.

And by June 30, 1996, total equity rose $20.8 million, or eight percent, to $281.3 million. The bank's dividend reinvestment plan contributed $1.9 million to the increase.

The total risk weighted capital ratio stood at 11 percent compared to 12 percent a year earlier. In 1992, it was 12.7 percent. The minimum requirement for Bermuda bank's is ten percent, ahead of the Basle Committee's eight percent recommendation.

On local operations income, the bank said net income decreased 10.1 percent to $21.6 million due to lower than anticipated earnings from credit, trust and fund administration activities.

Bermuda staff numbers decreased from 945 to 908. This included 22 redundancies resulting from computerisation. But internationally, staff rose to 426 from 354.

On international operations, Grand Cayman again reported record earnings. For the fiscal year, that operation made $9.7 million, up 10.1 percent.

In the UK, the bank reported a significant turnaround from a loss of $2.6 million in 1995 to a profit of about $1 million in 1996.

The also bank acquired trade financing firm Davenham Group Plc which is expected to add to its London results.

On the downside, the bank said that Hong Kong, and Singapore operations lost $3.3 million and $1.4 million respectively. The latter, involved in trust and fund administration, was in its first year of operation.

The bank also said its Hong Kong trust subsidiary lost money.