ANNUAL REPORT 2007 - Piscataqua Savings Bank

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A look back at 2007 reflects well on the many strengths of Piscataqua Savings Bank. I have outlined several of the Bank’s most significant results. I do hope you will take the opportunity to read each of our senior officer’s summary for the results within their area of the Bank.

  • Earnings improved
    • Net interest income and net profit increased
    • Income from trust/investment management services increased
  • Trust/investment assets under management increased significantly
  • The mortgage portfolio grew substantially
  • New deposit and mortgage products were developed in response to market demand
  • Capital increased in $’s and as a % of total assets
  • Asset quality is excellent for both the mortgage and securities portfolios

These successes, during a period of such uncertainty in our national economy and financial markets, are a result of the Bank’s reputation for being conservative, conducting our business based upon strong values, keeping our focus on providing personalized consumer banking services, and keeping our business truly local so that we can have a very positive impact on the level of service we provide to our customers.

Financial Results

Troy E. Neff, Treasurer/Financial Officer

The 2007 financial year demonstrated the stability of Piscataqua Savings Bank. The national economy slowed with a possible recession looming for 2008 as a direct result of sub-prime mortgage lending. The Federal Reserve instituted rate cuts to inject liquidity in the financial markets, the treasury yield curve experienced a downward shift, and inflation increased as the US dollar continued to weaken. Despite this challenging economic environment, the Bank’s loan portfolio grew, and revenue from trust activities continued to generate new highs.

Balance Sheet:

Total assets by year-end were nearly flat compared with 2006; however, that does not mean the balance sheet was stagnant. The securities portfolio was reduced by $9.61 million as the loan portfolio increased by $9.44 million. Cash and cash equivalents levels were slightly elevated from 2006. Premises and fixed assets remained flat, as no major additions were made in 2007.

The securities portfolio underwent a significant restructuring in 2006 to provide more control over liquidity. This strategy proved beneficial as loan demand was strong and we deployed maturing securities into local mortgages added to the loan portfolio. This shift from lower yielding securities to higher yielding mortgage loans was the most significant contributor to the Bank’s increased earnings.

Total deposits experienced a slight decrease from $141.96 million in 2006 to $140.62 million in 2007. The decrease is primarily attributable to outflows in money market accounts as the result of seasonal year-end withdrawals. Certificate of deposits remained stable. A concerted effort was made to shorten the overall maturities of the CD portfolio by offering a 9-month special. This restructuring allowed management to be prepared for further rate cuts by the Federal Reserve.

Capital levels increased over 2006 with the addition of 2007’s year-end earnings. The Bank’s capital position remains one of the strongest in the state of New Hampshire. As a mutual bank, we do not have the same obligation as a stock-owned bank to provide a return to stockholders; but rather, we can utilize this strong capital position to support our business model of remaining a very personal bank that provides services exclusively for individuals and families.


Net interest margin compression continues to limit earnings potential. Yields on the Bank’s earning assets continue to minimize potential earnings after interest expense. The level of net earnings produced by the Bank is in proportion to the strength of the net interest margin. Margin pressure is being experienced nationally by most community banks, especially those that specialize in residential mortgage lending.

Despite the margin compression, net interest income was a $105,600 greater in 2007 than 2006. This was achieved by total interest income outpacing 2006 levels by $1.13 million as a result of loan growth early in the year. Deposit costs were nearly $1 million greater in 2007 than 2006, $4.55 million, and $3.53 million, respectively.

Non-interest income increased from $1.04 million in 2006 to $1.36 million in 2007. The increase is primarily the result of the Trust Department recognizing record fees income.

Non-interest expense also increased a minimal 3.21% from $4.36 million in 2006 to $4.50 million in 2007. This modest increase demonstrates the conservative overhead structure of this institution.

After-tax net profit increased from $680,400 in 2006 to $865,348 in 2007. This increase reversed the trend of decreasing net profit which started in 2004.

Operational Results

Joan W. Gile, VP/Operations Officer

In 2007 we actively sought to increase deposits through growth in new customers as well as by broadening current relationships. We developed the Premier Money Market Account to attract customers with higher balances that have a need for liquidity. Our Premier Money Market Account pays a higher interest rate than regular money market accounts for balances of $25,000.00 to $250,000.00. Our Companion Checking Account was developed to expand our relationship with existing mortgage or trust/investment customers who may not currently have their checking account at Piscataqua Savings. This account offers all the features of our regular NOW Checking account, but also waives fees for other services such as wire transfers, stop payments and Piscataqua Savings’ fees at other banks’ ATMs.

We opened almost 30% more checking and money market accounts in 2007 over 2006 as a result of these two new products and our increased marketing efforts.

Online banking continues to be an area that is growing in popularity among Piscataqua Savings’ customers. The number of customers utilizing the online banking system grew by 26% in 2007 and more than a third of our online customers are paying bills from our online banking site. With the increase in postage rates due in 2008, we expect this number to continue growing.

The growth of debit card use at Piscataqua Savings mirrors what has been happening nationwide. Prognosticators indicate that by the year 2014, debit card use will outpace credit card usage. This volume of debit card transactions has increased the level of fraud. To be vigilant in protecting our customers from fraudulent transactions we implemented a program that alerts us to potential fraudulent or unusual transactions. This system looks at each transaction, compares it with other transactions the customer commonly makes, and alerts us if it appears unusual. We can then contact the customer to validate the transaction. If the transaction is not legitimate, we can disable the card immediately to protect the customer from further fraudulent attempts. The intent of this system is to stop fraud before it happens.

Our increased use and reliance upon technology drives our Information Technology Department to be proactive in upgrading systems and software to keep up with industry standards and the ever-changing technical world. During the year, we added three new servers to our network and upgraded the server in the Trust Department. We have also upgraded cabling and origination software in the Loan Department. We also installed the internet connectivity at Griffin Park to make it a fully functional disaster recovery site. We strive to maintain the most current hardware and software systems available as technology continues to be a priority in achieving continued success.

Lending Results

Richard M. Wallis, Senior VP/Senior Loan Officer

‘Subprime’ is the United States word of the year for 2007 according to the American Dialect Society. It became a household word because of the impact that subprime mortgage loans has had around the world. Subprime loans are mortgage loans made to borrowers with damaged credit histories or those that could not prove that they had sufficient income to make the monthly payments.

These loans filtered through the financial markets as mortgage backed securities with an estimated value of $1.3 trillion and were purchased by institutional investors all around the world. Due to the poor credit quality of these loans, defaults are expected to reach $200-$300 billion.

Because the full impact is not yet known, there is uncertainty in the financial markets that has placed downward pressure on the economy. Lending activity has been reduced since fewer borrowers are eligible for financing. In certain areas, home values have stopped appreciating and are declining. Much of the growing economy, leading up to 2007, was fueled by consumer spending financed through the equity in their homes.

Asset quality has always been the focus of Piscataqua Savings Bank’s lending activity. Prudent lending has resulted in a loan portfolio that has performed well in both good times and bad. As of year end 2007, the Bank’s delinquent mortgages, those loans 30 days or more past due, represented only 1.06% of total mortgages. The national delinquency rate for delinquent mortgage loans was 3.43%. The national delinquency rate for subprime mortgage loan was 17.31%. Piscataqua Savings Bank did not originate any ‘subprime’ mortgage loans and has none in its portfolio. While the Bank cannot avoid the effects of the downturn in the housing market, we are well positioned to weather the storm.

This slowdown in the housing market has actually created opportunities for the Loan Department. Fewer lenders exist due to market decline and mortgage company failures allowing us to compete for a larger percentage of the market. Jumbo loans, which are those loans originated over the Federal National Mortgage Association limit of $417,000, have been affected by the troubles of the subprime market. As a result, jumbo loan rates have been as much as a full percentage point above conventional loan rates. The Bank offers portfolio mortgage loans up to $1,000,000 with rates that are favorable to the competition’s jumbos by as much as one and one half percentage points. This allows us to offer a tremendous price advantage to local borrowers seeking a mortgage greater than $417,000.

Despite the declining housing market and economy, the Bank’s 2007 mortgage originations for portfolio were $32.7 million of mortgages. Volume was up 17.6% over 2006. While pay-offs were at historical lows, the mortgage portfolio was able to grow by 9.2%.

In an effort to increase mortgage originations, the Loan Department has developed a correspondent program for buying local mortgages. The program utilizes a reputable mortgage company that originates loans suitable for our portfolio. Each loan is underwritten to our standards by one of our loan officers in order to maintain loan quality. Once the loan is processed and closed by the mortgage company it is purchased and added to our portfolio. This arrangement allows the Bank to increase loan originations without adding personnel to the department. To date this program has brought in $1.7 million in additional mortgage loans that we would not have received otherwise.

In 2007, the Loan Department established a correspondent relationship for selling loans to SunTrust Mortgage. Although most loans the Bank originates are either loans held in our portfolio or loans that we will service, this relationship with SunTrust will allow us to provide loan products not suitable for our portfolio such as, jumbo fixed rates loans and non-owner occupied fixed rates loans. At times this arrangement will also enable us to offer a conventional fixed rate mortgage at an even lower rate for those applicants willing to forgo having their loan serviced by the Bank.

Given the opportunities presented to Piscataqua Savings Bank, such as reduced competition, lower interest rates, improved products, additional delivery systems, and a solid banking image, 2008 looks to be another promising year.

Trust/Investment Management Results

Richard G. Kaiser, VP/Senior Trust Officer

Since the inception of offering trust/investment management services in 1995, the Trust Department has successfully offered outstanding service to its clients, attracted new business, complemented the Bank by broadening customer relationships, and by adding financially to the bottom line. 2007 proved to be a very successful year as we again set new highs for the market value of assets under management and for net earnings contributed to the Bank.

These results were due to a combination of proactively developing new business and positive market returns. Market value of the Department increased to $153.7 million, up $13.5 million or 9.62% over last year. Of this increase, $9.8 million was organic growth resulting from new business; and, $3.7 million was attributed to market appreciation. The new business effort brought in gross new business of $17.38 million vs. $12.98 million in 2006, an increase of $4.4 million or 34.9%.

As of year-end, the Department managed 332 accounts, up from 312 a year ago. Total income of $1.12 million exceeded budget by 11.9% and exceeded the prior year’s results by 8.2%. Stringent control over expenses continued as the Department was under budget by 0.38%. Net profit after taxes was $180,800, an increase of $10,400 or 6.1% greater than 2006.

The increase in net new accounts, market value and related fee income was a direct result of the expansion our marketing efforts throughout the year. The billboard campaign was very successful and was well received by our clients and prospects (and proved to be a continual topic of conversation). Quite clearly it heightened awareness around the Seacoast that the Bank has a Trust and Investment Department. Also, the continued outreach program to increase qualified referrals from local attorneys, CPAs, and other professionals benefited from the Bank’s presentation of the Cannon Financial Institute Teleconference Series. The Bank offered local professionals the opportunity to attend these informal luncheon teleconferences to learn about the latest estate planning, wealth advisory, tax and legal topics. These sessions were conducted by nationally renowned estate planning attorneys. Professional educational credit was given to those in attendance. Through this program we have increased our exposure, developed several large new accounts, and have become recognized as a strong local resource for professionals to address their client’s needs.

During the past year we have also been gratified by the relationships that have been developed from referrals given to us by fellow Bank officers, staff, Trustees and Corporators. Having us serve the Bank’s current client base not only addresses their Trust and Investment management needs locally in a very “hands on and personal way” but at the same time strengthens their loyalty to the Bank.

Looking Ahead

While the economy of the Seacoast area has been relatively stable and Piscataqua Savings Bank has remained strong, we cannot overlook the potential effect that a continuation of economic decline and further uncertainty of the nation’s financial industry will have on all banks. The banking system is founded on consumer and business confidence. In light of the recent failures or weakened positions of many financial institutions including large investment firms, home mortgage lenders, insurers, banks, and rating agencies during the past year, we should increasingly expect concerned depositors, borrowers, and investment clients to consider and query the stability of the banks with which they do business.

Even in these uncertain times, I remain more optimistic than ever that “bigger is not better,” and Piscataqua Savings Bank’s strong financial base, mutual charter, and the very personal connection we have to our customers and the community will serve us well into the future.

Jay S. Gibson