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2010 SHAREHOLDERS LETTERPeoples Bancorporation, Inc. has remained profitable in the midst of challenging economic times, albeit mildly so, for the second straight year. Having turned the corner to profitability last year, our net earnings of $383,000 in 2010 are indicative of our Company’s ongoing ability to persevere in a very difficult economic environment. Indeed in a year where bank failures continued at an alarming rate across the nation, our ability to continue operating “in the black” while so many of our peers were reporting losses is a noteworthy achievement. In our continued commitment to protect the Company’s bottom line, we focused on maintaining strong net interest margins, controlling overhead expenses, and protecting asset quality. Our modest profitability is attributed to our diligent efforts in these three specific areas. In the current economic environment, maintaining yields on loans and investments has been very challenging. However, our efforts to reduce funding costs have been largely successful, and as a result we were able to improve the net interest margin from 3.54% in 2009 to 3.81% in 2010 while growing net interest income from $17.9 million in 2009 to $19.0 million in 2010. This marks the second year in a row we have improved net interest income by at least $1 million over the prior year. We maintained our focus on controlling overhead expenses as we extended the austerity measures that were adopted in late 2008. For instance, we maintained the discipline to keep compensation levels in check, and in doing so we lowered salaries and benefits for the second year in a row, reducing expense from a level that was already substantially diminished from the prior year. In fact, the only category of overhead to see any appreciable increase during 2010 was the cost of managing real estate acquired in the disposition of problem loans. We continued to aggressively deal with problem loan relationships in 2010. Accordingly, we provided $6.6 million for probable future loan losses, bringing our three-year total loan loss provision to $25.4 million. By year end we had accumulated $7.9 million in loan loss reserves, representing 2.32% of total outstanding loans. As a percentage of total loans, loan loss reserves are now at historically high levels. Just behind credit quality concerns, capital and liquidity remain top priorities for community bankers and regulators in today’s economy. To this end, we report that all three of our banks are considered to be “well capitalized,” which is the highest regulatory designation. Our liquidity is as strong as it has been in many years, with zero reliance on borrowed funds from correspondent banks, the Federal Reserve, or the Federal Home Loan Bank at year end. In 2010 our ratio of loans to deposits dropped from 77% to 72%, the lowest level in 24 years, while our portfolio of investments grew to $142 million and now represents over a quarter of our balance sheet. In ascertaining the Company’s underlying profitability, it is useful to discuss pre-tax, pre-provision income. While this performance metric is not a standard for generally accepted accounting principles (“GAAP”), management believes this non-GAAP measure is very useful in analyzing core operating trends, particularly in times of economic stress. The graph shown on the following page depicts a six-year tracking of pre-tax, pre-provision income (in black) as well as the comparable GAAP financial measure, which is net income (in blue). Prior to the recession, the graph depicts three consecutive years with very stable earnings according to both metrics. It then reveals a drastic downturn in 2008 followed by modest recovery in 2009 and 2010. Pre-tax, pre-provision income essentially measures the Company’s “core earnings” and the $6.3 million earned in 2010 shows a near return to the level of profitability we experienced before the recession. Thus we believe the underlying earnings power of the Company to be relatively strong. In order to completely return to the levels of profitability that we enjoyed before the recession, we believe that we must first see the reversal of two major trends. First, a substantial improvement in credit quality across the banking industry is needed. Ongoing loan charges are still dramatically higher than what we experienced for many years. The other requisite for profitable community banking is the return to a more normal interest-rate environment. Considering the Federal Reserve has held the prime lending rate very low at 3.25% for over two years, net interest margins are compressed nationwide. As the economy improves market interest rates should eventually rise, which could allow for the widening of margins across the industry. We are encouraged by the modest levels of profitability we have seen in 2010, as well as the strength of our capital position, loan loss reserves, and abundant liquidity. At the same time, we are very cognizant that economic difficulties still persist, and so we remain diligent in our efforts to constantly improve our financial performance. Remember that as a shareholder, this is your Company too, so please know that we are eager to fulfill all of your banking needs. On behalf of our Board of Directors, management and employees, we are deeply grateful for your continued support and your patronage with our family of community banks. PEOPLES BANCORPORATION SENIOR MANAGEMENT COMMITTEE |
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