Bermuda Commercial Bank Ltd. (BCB) suffered a net operating loss of $380,000 for the year ended September 30, 2009, as its earnings power was hit by low interest rates.

The net loss compared to a net profit of $5.16 million in 2008 as the economic downturn took its toll.

The bank made a net gain in shareholders' equity, due to a $1.81 million unrealised gain in investments in securities.

Chief operating officer Horst Finkbeiner's nine-monthly report said that the financial turmoil over the past year had deeply impacted all levels of business and few companies remained unscathed by the initial credit crisis or the lingering hangover in the markets.

"As a service provider to primarily financial companies, BCB has suffered the effects of the crisis as many of our clients have experienced reduced fortunes and continue to do so," he wrote. "In 2009 client attrition has outpaced new business.

"BCB's business model has always been vulnerable to reductions in base interest rates – it is the trade-off we accepted for our low risk balance sheet approach.

"In 2009 this vulnerability has been severely tested by an unprecedented interest rate environment which has decimated our core interest income."

Short-term US interest rates finished the year close to zero and resulted in the bank's interest income being reduced dramatically to $6.51 million from $19.26 million. Despite being slightly offset by lower interest expense, the net result was a $3.76 million decrease in its net interest income.

On the plus side, Mr. Finkbeiner revealed the bank does not have any of the credit derivative investments or high risk lending exposure that has caused problems for banks across the world and BCB therefore posted no related investment or credit losses, with both its liquidity and the safety of its client deposits remaining in good shape. In 2009 its capital base reached its highest level ever, surpassing $75 million.

Fee and other income decreased by $1.7 million to $2.88 million for the year ended September 30, 2009, driven by reduced custody and fund administration revenues compared to 2008 levels.

In the second half of last year, the bank saw a number of large clients move their assets to other jurisdictions and the generally its remaining clients' business remained low. Foreign exchange income also reduced significantly following a slow-down in client activity.

The bank's total assets were $423.35 million at September 30, 2009 compared to $486.84 at September 30, 2008, reflecting a decrease of $63.49 million or 13 percent. Its asset quality and liquidity remained excellent and at September its assets were 96.5 percent cash, money market funds and term deposits with 98.3 percent of this having maturities of less than one month.

However, deposit levels at the bank stayed lower than previous years as many of its corporate and fund clients suffered reduced business activity at this time.

At September 30, 2009 the BCB's shareholders' equity stood at $75.05 million compared to $71.62 million a year earlier. Mr. Finkbeiner said that, in light of the bank's recorded operating loss for the year and continued historically low interest rates, the board reluctantly decided to withhold any dividend payments during the year.

"Management considers that any economic recovery will be slow but could bring increased interest rates and stronger corporate client activity as 2010 progresses," he said. "The bank is well-placed to benefit when this occurs.

"As this letter goes to press we are seeing some signs of a muted recovery within the bank. Downward trends appear to be levelling off and pipeline business is strengthening, albeit from a very weak base."