The Bank of Butterfield recently released its first quarter results for 2010. I have combed through the press release, presentation and financials and come away with a few important points and observations. Let's begin with the positives.

The release package as a whole was excellent in terms of disclosure. The new management team promised increased transparency and disclosure at the annual general meeting. I have to say they have delivered on this front. The webcast and presentation adds enhanced details and granularity and should help all investors and shareholders alike.

There were also a few positive operational aspects to note as well. The banks capital base of over $1 billion, with a total capital ratio of 20 percent and a Tier 1 capital ratio of 14.3 percent are at record highs for the bank and well in excess of the Bermuda Monetary Authority minimum requirements. This leaves the bank in a very strong capital position with the increased ability to weather any future adverse credit write-downs or loan performance issues. Total customer deposits climbed by $68 million, quarter over quarter. At this stage there appears to be no loss of confidence in the banks solvency.

There are a few bad or more worrisome operational issues, however. Loan demand has softened and loans are being run-off. This has lowered the loan balance and subsequently some earnings power for the bank with the drop of $104 million in assets.

Furthermore non-performing loans have begun a small creep upward by about $1.3 million as a result of difficulties with residential mortgages in Bermuda. This will need to be monitored to ensure deterioration does not accelerate in Bermuda's weakening economy. On a normalised basis, net interest income continues to fall. Part of this is the result of the Bank's recent focus on investing in safer but lower yielding cash and deposits with other banks.

The low interest rate environment continues to act as a headwind in terms of generating higher net interest income. Assets under management (AUM) at Butterfield Asset Management continue to decline. AUM fell about five percent quarter over the quarter and seven percent year over year. What is concerning is this is over a period of appreciation in the stock and bond markets so the net fund flows would actually be much greater when accounting for the general rise in asset prices. Part of this may be a shift out of the Butterfield Money Market Fund into higher yielding bank deposit products.

Again, this trend must be monitored as continued deterioration in the AUM balance will effect the future earnings power of the asset management division of the bank.

What continues to be the "ugly" component of the quarterly report is the efficiency ratio which ran at about 95 percent. As a comparison, most banks run efficiency ratios between 55 and 65 percent. The lower the efficiency ratio the more efficient the bank. Now patience must be granted to management to "turn the ship".

It will take a great deal of time to right-size the company to fit its contracted balance sheet. The headcount reduction of 102 people or about 6% of the total workforce is a move in the right direction, but much more needs to be done. At its current cost structure the bank is unlikely to earn any money for common shareholders given its current revenue mix, asset base and the interest cost of the preference shares.

Some hope may be prescribed for an increase in revenues from a more normalised interest rate environment but we do not foresee this to happen in the near term. Furthermore, if assets are deployed in less risky but lower yielding investments, loan demand remains soft and non-performing loans mount it is hard to envision a significant bounce in revenues. Thus a focus on cost containment and control will be paramount in restoring the bank's profitability.