income to $2.5 million, reports Ahmed ElAmin . Mr. Johnston believes the way has been paved for steady growth For the second year in a row the Bank of N.T. Butterfield and Son Ltd. has had to take millions of dollars in one time charges against its profits, reducing net income substantially.

Without the $32.5 million in charges the Bank of Butterfield would have reported record profits of $35 million for the fiscal year ended June 30. The exceptional losses -- mainly for additional loan provisions against its discontinued UK operations -- reduced the bank's income down to $2.5 million.

Last year the bank took $21.5 million in exceptional charges, bringing net income down to $8.1 million.

"We know that our strategy of building on core strengths is succeeding, as evidenced by the good earnings performances of our asset management, Cayman, Guernsey and treasury businesses,'' bank president and chief executive officer Calum Johnston said. "Obviously, we would like to have seen our success reflected in a strong net income number, but are satisfied that our core results, overall, demonstrate significant performance improvement.

"Furthermore, we know that our prudent approach to provisioning, particularly with regard to those businesses now exited, was right, and very necessary, to strengthen the balance sheet, paving the way for steady growth.'' Of the exceptional charges this year $26.1 million was for loan loss provisions connected with exiting former operations in the UK -- a Slough-based subsidiary and a London branch which were closed last year.

Bank of Butterfield had taken a charge in the previous financial year of about $21.5 million for exiting UK and Singapore operations. About $16.8 million of that was due to the London operations. The total loan loss provisions taken off the balance sheet for UK operations was about $42.9 million.

"This is primarily in anticipation of calls on some guarantees given early in the financial year to secure the agreement of other banks to take over certain loans and to provide funding for a business that was sold in the United Kingdom,'' Mr. Johnston said.

Another $4 million was taken off the books due to long standing internal problems in accounting for the way money was being transferred between departments from temporary "suspense'' accounts set up for securities trading.

Mr. Johnston said the problem stemmed from departments using different computer systems and the manner in which internal accounting was reconciled.

Some of the figures had to be manually reconciled and others were double counted with the result some figures were higher than they should have been.

This year Mr. Johnston also decided to take another charge of $2.4 million due to changes relating to the way post-retirement employee medical health care benefits are accounted for in the books.

The bank took a $2.5 million charge relating to outstanding goodwill, the book value of a redundant computer system, and the residual compensation of officers retired or resigned.

Mr. Johnston, who took over the helm last December, likened the bank as he saw it then to an "old Bermuda home'' in "need of a few repairs''. He went about and changed the management team and set a strategy of further cleaning up the balance book, a process started by his predecessor John Tugwell.

"Now our house is stronger,'' he said yesterday at a press conference.

The figures back up his statements. At June 30, total revenues from core businesses before the exceptional charges for the UK and outstanding items were $35 million, up 18 percent from a year ago.

Non-interest income made up 52 percent of total income, up four percentage points. Total income was $77.9 million -- up 16 percent. The group's Cayman Islands and Guernsey businesses remained the stellar performers. The Cayman Island business earnings were up 22 percent, while the Guernsey business posted a 19 percent gain.

Meanwhile, the Hong Kong operation was "modestly profitable in a difficult economic environment compared to losses in previous years''.

Operating expenses increased 5.8 percent to $115.7 million.

"Once again, a disproportionate amount of expense was associated with the Bermuda banking operation, where a number of cost-efficiency initiatives have now been launched,'' Mr. Johnston said. "The cost to income ratio for Bank of Butterfield group overall, before exceptional items, was 78.8 percent, compared on a like basis with the previous year of 78.7 percent, evidencing an underlying trend in the right direction.'' Bank of Butterfield profits reduced He said the next step was to improve the efficiency of the Bermuda retail operations. He said a 60 percent cost to income ratio was "regarded as good in the business''.

Without the one time charges return on equity was 12.6 percent, earnings per share was $1.74, and return on assets was 0.71 percent. The charges brought return on equity down to 0.9 percent, earnings per share to 12 cents and return on assets to 0.1 percent.

"Without question, we have considerable work to do in the year ahead and I am satisfied we have now created the solid base necessary from which to build for the future,'' Mr. Johnston said. "Our progress will come from continually improving service to our customers, prudent risk management, the hard work of staff and the leadership of the management team that is now in place.'' He said the highlights of the financial year was not being downgraded by Moody's rating agency, and the issue of US$75 million of subordinated floating rate notes to strengthen the group's consolidated total capital position.

Moody's has kept the bank at an `A3' rating based on what it said is the bank's strong capital position, low-risk balance sheet and "fairly stable'' operating environment.

At June 30, Bank of Butterfield had assets of $5 billion, up 13 percent from $4.4 billion a year ago. "This increase, which was particularly evident in the second half of the year, was fuelled by strong customer deposit growth, primarily in Bermuda and Guernsey, plus the impact of the additional $75 million of subordinated debt capital,'' Mr. Johnston said.

At year end the group held $17.25 billion in client assets under administration, compared to $15.4 billion the year before. It had deposits of $4.61 billion, up 13 percent over last year.

He said the growth indicated customers' confidence in the bank despite the setbacks.

Since Mr. Johnston took over he has brought in David Brierley to head the bank's credit risk management, given Graham Brooks the responsibility for all international offices in addition to the group's private banking and asset management businesses, made Wendell Emery an executive vice president of operations, and named Richard Ferrett as executive vice president and chief financial officer. Janet Nearon was given a new responsibility as head of the newly formed customer and staff relations unit. Patricia Bean has become senior vice president of human resources. Ronald Simmons is now senior vice president and chief accountant.

Yesterday, the bank's stock closed at $16, down 3/8. The bank spent $12.1 million repurchasing 819,852 of its shares between November and June 30.