against what would have been projected record profits for the current financial year.

And in a move that has at least one investment analyst puzzled, the bank's board is debating issuing a debt note to raise cash, The Royal Gazette has learned.

In relation to the $33 million charge Bank President and Chief Executive Officer Calum Johnston said the bank was increasing its provisions for potential losses connected with exiting former operations in the UK -- a Slough-based subsidiary and a London branch which was closed last year.

The additional provision is projected to bring the company's profit down to $5 million for the year ended June 30, he said. That's a 50 percent drop from the $10.4 million profit recorded in the previous financial year when the company took a one-time charge of $20.6 million against what would have been $31 million in earnings.

The charge in the previous financial year was for operating losses and costs of exiting the bank's Singapore subsidiary and the UK operations. The decision to close the money losing operations was made by former top executive John Tugwell who quit for personal reasons after less than a year on the job. Mr.

Johnston was then appointed to the position.

Without the charges and provisions the bank would have recorded a gain of 23 percent this year over the $31 million of the previous financial year.

In a press statement the bank's management expressed disappointment that the "strong success'' of the current financial year was "overshadowed by past strategic miscues''.

The bank announced last week it had underestimated its reserves needed to exit the UK mortgage operations and expected to "substantially increase'' provisions for potential loan losses. However it did not release a figure.

In an interview yesterday Mr. Johnston said the bank decided to make the figures public because investment analysts had asked for and received more substantial figures. He said the $33 million provision was for loans on the books that haven't been collected yet.

"Money is being set aside in case we don't collect the loans,'' he said. "It will absolutely clean up the balance sheet.'' The company is also taking an accounting charge of $30 million off retained earnings for post-retiree medical benefits and for other write offs.

"In addition, the bank has also decided to write-off in the current financial year ending 30 June 1998 a number of items, which include systems costs and reconciliation issues relating to its Bermuda based operations and outstanding goodwill, and adopt a proposed accounting standard issued by the Canadian Institute of Chartered Accountants covering the accounting for post-retiree benefits,'' the bank stated in the release.

Mr. Johnston said previously the bank had paid medical benefits when charged.

Now a provision is being made for future benefits. The board is currently considering whether to set up a separate fund to cover retirees' medical benefits.

Along with the publicly released news The Royal Gazette has learned the board of directors is considering whether to issue a $75 million subordinated debt floating rate note.

The issue is being negotiated with Lehman Brothers, Inc. at a LIBOR rate plus 50 basis points. The board thinks the note is "expensive'' Mr. Johnston said and is considering whether to proceed.

"All we are doing is making sure we have enough equity,'' he said. "We are covering the writeoffs and are looking at replacing capital, more so if we decide to continue with the share buyback programme.'' The bank announced it had repurchased $12.1 million of its shares, or four percent, by the end of March on the Bermuda Stock Exchange because the board thought the stock was undervalued.

Mr. Johnston said the bank was projecting a capital ratio of about 13.6 percent at the end of June compared to 12.86 percent at the end of June last year. Capital ratio refers to the risk weighed capital the bank can call on in relation to assets. A higher ratio helps attract clients who want to do business with the bank.

Bermuda requires a ten percent capital ratio, while international standards require an eight percent ratio.

"Our capital ratio is very strong and it will get stronger in 1999 as profits come in,'' he said.

The potential debt issue to raise capital has a local analyst puzzled when he considered it in relation to the announcement about the additional loan loss provisions.

"I don't know what's going on to be able to make an intelligent analysis,'' the analyst said. "The pieces are not fitting together.'' The analyst didn't want to be named because of the non-public nature of the information.

"There's something missing here,'' he said.

Bank of Butterfield to cut profits "What they are doing with the cash is a wild card. Why are they doing it? The loss provision only affects the balance sheet. It doesn't affect current cash.

What's of interest to investors is it's implying suspension of the share buyback programme. If not it would imply the bank is borrowing money to prop up the share price. Suspension may affect the upward path of the stock price.

People have been collecting shares based on the buyback programme.'' He called the size of the loan loss provision "phenomenal'' compared to its book. The bank had loans at 1997 financial year end of about $1.25 billion.

"It's good that they are cleaning it out but its bad that it's on there,'' he said. The analyst speculated that the loan loss provision might be a way of eliminating UK taxes, or a means of making a selective overestimated write off so in the future, if and when the loans are paid the balance sheet can look better.

"It might be an ace in the hole,'' he said. About $3.8 million worth of Bank of Butterfield stock traded yesterday on the Bermuda Stock Exchange yesterday, as the price slipped 25 cents to $18.

The financial community was shaken yesterday by news that the Bank of Butterfield is to pare back its projected profits for the current financial year to cover potential loan losses, reports Ahmed ElAmin Calum Johnston