Butterfield Bank yesterday announced a loss of $16.5 million for the second quarter, resulting from combined losses totalling $50 million on a write-down in the value of mortgage-backed investments and support of its Money Markets Fund.

Butterfield chief executive officer Alan Thompson said in an interview yesterday that the Bank was "not immune to the global economic environment" and added that he could not completely rule out more losses in future quarters.

However, the bank will realise an "extraordinary gain" in the third quarter in excess of $110 million as a result of the merger of Butterfield Fund Services with Fulcrum. That deal was also announced yesterday.

The Bank recorded a $27.7 million unrealised loss relating to two credit support agreements with the Butterfield Money Market Fund. And it also accounted for a $23 million realised loss on an item that suffered permanent impairment in its "held to maturity" portfolio.

The net loss compares to a profit of $35.9 million in the same three months last year and came despite a net operating income of $34.3 million in the second quarter.

The action taken to support the Money Market Fund will protect investors. Mr. Thompson said the fund was now "in great shape" and had maintained its AAAm rating from Standard & Poor's, the highest rating possible. The Bank does not anticipate entering into any further credit support agreements with the Fund.

Money market funds have a low-risk, low-return profile and traditionally invest in "safe" and highly liquid investments.

The problems came about because of investments by many banks, including Butterfield, in structured investment vehicles (SIVs), complex financial instruments backed by assets such as mortgage debt. The dramatic slump in the US housing market and a simultaneous wave of sub-prime mortgage delinquencies reduced the value of some SIVs, even those rated AAA by ratings agencies.

Banks including HSBC, Wells Fargo and Legg Mason took actions similar to Butterfield's to protect their money market funds. In effect, the banks have to taken the hit to protect investors.

The second loss to impact Butterfield's results was a $23 million write-down on securities backed by US mortgages.

"We have a large investment portfolio and it's very diversified and some of it relates to real estate," Mr. Thompson said. "The Group ceased investing in the US residential asset-backed mortgage and related markets over a year ago.

"The question everyone will be asking is will there be more (losses)? I'd like to say 'no', but I can't guarantee that. We are dealing with the markets."

Mr. Thompson did not have figures available on Butterfield's current US mortgage-linked investments. At the Bank's annual general meeting in April this year, the CEO said the bank's investment in US residential collateralised mortgage obligations (CMOs) totalled $479 million at December 31, 2007, with a fair value of $371 million, reflecting wide credit spreads. CMOs made up 12.8 percent of the Bank's total held to maturity investments at that time.

The Bank had no loan exposure to the US market, Mr. Thompson said. In fact, its loans had seen "no deterioration at all".

"Underwriting standards for loans in Bermuda are much better than those in the US," he added. "We are more conservative and that has favoured us in the long term."

Butterfield has operations in Bermuda, Barbados, the Cayman Islands, the Bahamas, Guernsey, Switzerland, the UK, Malta and Hong Kong.

Total operating revenue was $77.9 million compared to $116 million a year ago.

Total operating expenses increased year on year by $14.4 million, or 18.3 percent, to $92.9 million. Salaries and other employee benefits were up 11.8 percent year on year, to $52 million, primarily reflecting the Group's expansion. Total headcount at June 30, 2008 was 1,929, compared to 1,800 last year. The Bank's Bermuda workforce totals 881 people.