Butterfield Bank may have to raise additional cash through a rights or share offer if its capital position continues to deteriorate, according to LOM's equity research report on the bank released yesterday.

The report, written by Jeremy Dyck, investment advisor at LOM Securities (Bahamas) Ltd., found that the bank might be obliged to conserve cash through cutting or suspending quarterly dividend payments and claimed its recent share price decline below $3 had left it ripe for a takeover by a larger international bank.

It added that the most distressed assets in Butterfield's held-to-maturity portfolio remained "severely underwater" and represented a "significant impediment" to the bank's recovery.

LOM said the present uncertainties surrounding Butterfield's held-to-maturity book and the impending release of its 2009 financial report prevented it from making an investment recommendation.

The report said that despite the bank's poor comparative performance over the first nine months of fiscal 2009, revenue and profitability measures were expected to pick up slightly during the final quarter of last year and into the first few quarters of 2010.

But it added that the bank's investment book remained its biggest concern, with gross unrealised losses, pertaining mainly to mortgage and asset-backed securities, standing at $319 million as of the thrid quarter of 2009.

It said current market capitalisation was $271 million and reported shareholder equity was $659 million (including $200 million in preferred equity).

"While book losses have fallen by over $120 million since year-end 2008, the rate of future recovery is unknown, and may not be fast enough for the bank's capital position and operating income to absorb ongoing losses," the report read.

"This lack of transparency makes for difficult evaluation of the investment portfolio. Potentially, some of the most toxic CMO [collateralised mortgage obligation] and ABS securities remain on the books, with little sign of recovery at present.

"Owners and prospective buyers of NTB shares are no doubt looking for answers as to why the stock has fallen to its current, depleted level of $2.75 per share, and what is in store for the future of the bank."

During the first half of 2007, Butterfield bought more than $1 billion in Collateralised Mortgage Obligation and Asset Backed Securities investments - the majority of which were 'AAA' rated at the time - however, the subsequent downturn in US real estate prices and the declining value of the investments forced the bank to writedown more than $200 million against earnings over the past six fiscal quarters, the report found.

Meanwhile the bank has taken a hit with periodic losses and made large purchases of impaired investments through credit support agreements provided to the 'AAAm' rated Butterfield Money Market Fund.

LOM added that in September 2009, Butterfield took another $132 million in 'primary asset-backed' securities onto its books and placed them in its available-for-sale portfolio, with a carrying value of $53 million.

LOM reported that the bank does not have direct access to the 'no-cost' US Federal Reserve funds window, which has proven detrimental to its credit spreads compared to its US counterparts.

Had the bank been allowed access to US Troubled Asset Relief Programme funding, it may have helped the bank's capital situation and negated the need for the preference share issue, LOM added.

A Butterfield Bank spokesman said: "As a matter of policy, Butterfield does not comment on speculative statements. Nor do we comment on analyst reports, as we do not want to be seen as endorsing the opinions of third-parties or in any way being responsible for the content of documents produced outside the bank."

For a full version of the report drop in at LOM's offices in Reid Street, contact 292-5000 or visit the website at www.lom.com