The year 2008 presented a challenging environment including nothing less than a recessionary economy, dysfunctional credit markets, a collapse in consumer confidence, and major losses throughout the investment markets. In the midst of these conditions Piscataqua Savings Bank remained strong. The Bank benefited from its independent mutual form of ownership and its focus on serving local individuals and families. Over the years the Bank continued to adhere to strategies of underwriting home mortgages responsibly, investing in securities that provide liquidity with minimal credit or interest rate risk, operating from a single office with a small staff to keep overhead low and customer satisfaction high, and maintaining a very strong capital position. The turmoil in the financial industry has raised awareness or served as a reminder for many people of the advantages of doing business with Piscataqua Savings Bank.
Last year we emphasized the Bank’s strengths through an increased marketing effort that included redesigning our website, updating our logo, expanding our presence in the media through advertising, letters to the editor, and articles published about the Bank. We also took a more active role in the legislative process by testifying in support of NH Senate Bill 315. This bill was targeted at preventing unscrupulous companies from using another financial institution’s name to deceptively market high risk loan products to our customers. The bill was signed into law by Governor Lynch on September 2, 2008.
In 2008 the Board of Trustees devoted significant efforts to reviewing their oversight of corporate governance structure and procedures. The Bank engaged John Funk, Esquire of Gallagher, Callahan, and Gartrell to work with the board and senior management in developing updated corporate documents. This effort was not only to comply with current law, but also to establish clear guidelines for corporate processes which will protect the Bank’s mutual charter into the future. Additionally, the Board established a Governance Committee which will meet regularly each year to oversee and be supportive of sound corporate governance practices.
The Bank’s performance and accomplishments on the whole were very positive during 2008. I hope you will take the opportunity to learn more about the Bank’s progress and accomplishments by reading the following comments below by our senior officer’s for their respective area of the Bank.
Troy E. Neff, Treasurer/Financial Officer
Words that were used to describe the 2008 financial markets were “meltdown and crisis.” The markets demonstrated extraordinary volatility and instability. News commentators were constantly informing the public that the markets were operating in a broken fashion or in some cases not at all. The federal government took unprecedented action with the takeover of Fannie Mae and Freddie Mac along with the bailout of AIG. The government has also taken substantial equity positions in Citigroup and Bank of America. Many community banks have taken capital injections from the government’s Capital Purchase Program (CPP), a program designed for healthy banks, but public perception has been negative.
In 2008, total assets increased by $20 million when compared with year-end 2007. The loan portfolio increased by $15.7 million. This growth was funded by depositors seeking a safe haven for their funds. Total deposits increased by $18.3 million. The securities portfolio increased by $1.4 million and cash and cash equivalents increased by $3 million from year-end 2007.
Piscataqua Savings was not required to recognize any impairment in the securities portfolio. The Bank had no holdings of the Fannie Mae or Freddie Mac preferred stock that forced thousands of institutions to write off these securities and in many cases resulted in institutions experiencing negative earnings for the year. The Bank’s investment portfolio consists predominantly of non-callable U.S. Government Agencies with stated maturities of three years or less.
Capital increased over the prior year with the addition of 2008’s year-end earnings. The Bank’s capital position remains one of the strongest in the State of New Hampshire. As a mutual, the Bank does not have the obligation of 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 gearing our services exclusively to individuals and families.
The narrowing spread between the yield on earning assets and interest expense has a direct effect on the Bank’s earnings potential. The level of net earnings produced by the Bank is proportionate 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 this margin compression, net interest income increased from $4.5 million in 2007 to $4.8 million in 2008. Interest income for 2008 was comparable to 2007’s level of $9.1 million. This is the direct result of extraordinarily strong loan activity in the first half of the year. Interest expense decreased as market interest rates fell following the Federal Reserve’s interest rate cuts and the supply of deposits increased in the marketplace. As a result, total interest expense decreased by $350,000 from 2007 levels even though deposits increased by $20 million.
Non-interest income of $1.3 million in 2008 remained comparable to 2007 levels.
Non-interest expense increased from $4.4 million in 2007 to $4.8 million in 2008. Salaries and employee benefits experienced a minimal increase from 2007 levels. The more significant increase was attributable to data processing and other administrative expenses related to the increased number of accounts being serviced by the Bank.
After-tax net profit increased from $865,348 in 2007 to $888,963 in 2008. The level of earnings continues to be sufficient to further strengthen the Bank’s strong capital position.
Joan W. Gile, VP/Operations Officer
The Bank experienced substantial activity in opening new deposit accounts during 2008. With much of the media’s attention on banking and other financial institutions, many individuals reviewed their own financial situation. FDIC insurance became a huge focus and much time was devoted to analyzing coverage and assisting customers in structuring their accounts to maximize FDIC coverage. On October 3, 2008, the FDIC temporarily increased its coverage from $100,000.00 to $250,000.00 per depositor through December 31, 2009. Although this increase helped calm many fears, many new depositors turned to Piscataqua Savings Bank for its reputation for adhering to safe and sound banking principles. Over 280 new customer relationships were built in 2008. This compares with 197 in 2007. Total deposits grew from $141 million as of December 31, 2007 to $159 million by year-end 2008 representing 13% growth. This growth was largely in Certificates of Deposit. The number of new checking and savings accounts also increased significantly. We opened over 750 new checking and savings accounts in 2008. These accounts are fundamental core deposits and help build lasting relationships. Customers with multiple account relationships are more likely to continue to build their connection with the Bank and are less likely to move to other financial institutions.
This flight to safety continued into the fall and winter months and significantly impacted Individual Retirement Accounts. As the news from Wall Street floundered, many customers moved their retirement accounts to the safety of the Bank’s IRA Certificates of Deposit. Total IRA CDs increased by almost $1 million in 2008.
Piscataqua Savings Bank has experienced increased growth in all electronic banking services. Most customers take advantage of at least one form of electronic banking service each month. There are over 12,000 automatic transactions such as direct deposit or direct withdrawals each month. In addition there are over 21,000 ATM and Debit Card transactions monthly.
Online banking activity continues to increase as a very convenient way to monitor account activity, transfer funds, and pay bills. In 2008, we averaged 14,000 account inquiries each month. Additionally, banking customers viewed an average of 500 checks online each month. About a third of the online banking users take advantage of the online bill payment services as a very quick, safe and easy way to pay bills.
While online banking has increased, many customers continue to utilize telephone banking. Our HomeTeller is a convenient way to check balances and transfer funds between accounts. On average, 300 customers make over 2,500 inquiries each month by calling the HomeTeller.
While electronic banking services are quick, convenient and safe, we still enjoy the face-to-face contact with our customers each day in the Bank. Our experienced staff is always ready to assist customers in person or on the phone. Please call or stop by if you would like information on any of our products and services.
To respond to the ever-changing needs of our customers, Piscataqua Savings began offering Health Savings Accounts (HSAs). HSAs offer a convenient, tax-deductible means to save and pay for qualified medical expenses. The Piscataqua Savings Health Savings Account offers very competitively tiered interest rates with no monthly service charges, the convenience of check writing and debit card capabilities, as well as online access. Monthly statements provide images of checks written and detailed descriptions of debit card usage. We expect this product will be in even greater demand in the future and will be one which we will actively market.
Piscataqua Savings Bank continues to support the educational efforts of our employees. In October Susan Hauge (Customer Service Representative), Stephanie Nagel (Bookkeeping) and Mary Ayer (Compliance Specialist) attended the Northern New England School of Banking. This program, held at UNH, provides an introduction to bank management and is an excellent opportunity to provide career development for employees while enhancing the Bank’s ability to provide quality, expert service to our customers.
Richard M. Wallis, Senior VP/Senior Loan Officer
The nation has been in the grips of a credit crisis that created havoc for mortgage lenders across the country. Since late 2006, over 300 major lending operations across the country have closed.
While many lenders scrambled to generate new mortgage business, it has been busier than ever for the Loan Department at Piscataqua Savings Bank. Many borrowers were seeking a financially solid lending institution to do business with during these uncertain economic times. With plenty of money to lend at favorable terms, the Bank experienced a record year for mortgage originations. The Loan Department originated $57.1 million in mortgage loans, the highest volume of lending for a single year in the bank’s history. This high loan volume enabled the Bank to increase the loan portfolio by $15.7 million or 13.36% over 2007 year-end.
As we look ahead, there appears to be more uncertainty in the economy that could have an impact on the Bank’s loan portfolio. Unemployment has increased to levels not seen in decades and home values continue to decline. According to the Bureau of Labor Statistics, the national average unemployment rate as of December 31st was 5.8%. Most of New England, especially New Hampshire, continues to have lower than national average unemployment. New Hampshire had the lowest unemployment rate in New England at 3.8%. Many economists are forecasting unemployment to reach 10% nationally before we start to see any improvement. Home prices continued to decline throughout 2008 with the average price declining 8% for New Hampshire. According to a study by First American CoreLogic, 21% of all mortgages in Rockingham and Strafford counties had negative equity as of December 31, 2008. These economic factors will have an impact on both the growth and performance of the loan portfolio during 2009 and beyond.
Mortgage delinquency rates have increased slightly over the past year. Piscataqua Savings Bank’s delinquencies were 1.11% of total loans on December 31, 2008, up from 2007 when it was 1.06%. This compared very favorably to the national average delinquency rate of 6.92%, as reported by the Federal Reserve Statistical Release. In 2007 the national average delinquency rate was at 3.31%, more than doubling in the one year time period. If the economy continues to deteriorate, additional efforts may be required to manage the loan portfolio, but we continue to be in a good position to weather the storm.
Trust/Investment Management Results
Richard G. Kaiser, VP/ Senior Trust Officer
This past year, 2008, was unlike any other year that we can remember in our collective trust careers. During the year, volatility in the markets tested the mettle of most investors as there was a never-ending series of events which affected the stock, bond, credit, and cash equivalent markets alike. Throughout 2008, we saw the continued de-leveraging of the housing market which started in the summer of 2006, the de-leveraging of the financial sector which began in 2007 and the de-leveraging of the consumer which began in 2008. The reduction in leverage and virtual disappearance of liquidity in the markets along with investors’ heightened aversion to risk were catalysts to precipitate the market drops most notably between September and December of 2008. As difficult as the first three quarters of 2008 were, the major indices fell more in the fourth quarter than they did in the first three quarters. At year end the Dow Jones was off 31.9%, the Standard & Poor’s down 37% and the NASDAQ falling 39.9%. International stocks, as measured by the MSCI EAFE Index, lost 43.1%. Unlike prior years there were no “safe havens.” There were no sectors in the S&P which provided a positive return for the past 12 months. The only asset group which bolstered a positive return for 2008 were Treasury issues which had an annual return of 5.24%. Unfortunately, other fixed income instruments fared poorly with corporate bonds, asset-backed securities and securitized home equity issues down in excess of 36% for the year.
Despite the extreme volatility during the year and poor performance in almost every market, the number of Trust Department accounts grew during the year from 332 to 350, a 5.42% increase. This was due to our continued efforts to develop new business through local attorneys, CPAs and other professionals, as well as to increase market exposure through the Bank’s website, media advertising and in-house referrals. While there was an increase in our account base, the market value of the department declined from $153.7 million at the end of 2007 to $134.4 million on December 31, 2008 a decrease of $19.27 million or 12.5% due primarily to the devaluations in the markets. New business for 2008 was $13.7 million, $1.7 million over the budget for the year; however, $3.68 million less than for 2007. Net new business after distributions of principal and terminations of accounts came in at $4.6 million compared with the prior year’s net of $9.1 million.
Although the year over year net new business and Department’s market value was down, this was the third consecutive year in which Trust Department revenues exceeded $1 million. Total trust fees for the year were $1.1 million, $16,700 or 1.5% over budget and $6,200 over 2007. Expenses for the year came in at $36,000 or 3.96% over budget for an after-tax profit of $114,600; 10% less than budget and $66,100 less than 2007.
We believe that 2009 is going to be an extremely difficult and challenging year for the U.S. economy, global economies and equity, bond, and cash equivalent markets alike. The excesses which precipitated the markets last year took many years to develop and it may take several years before these excesses dissipate enough for credit markets and hence the equity and bond markets to begin to function normally. Because of this, we anticipate that the economy will probably continue to contract during 2009 which portends that it may take several years before the economy turns around and returns to a normal growth pattern. This will affect our Trust Department account market values on which fees are taken and our contribution to the Bank’s bottom line. To help mitigate this, we will be attempting to maintain or, if possible, increase new business by continuing to develop highly qualified referrals from professionals, Bank officers, Trustees, Corporators and staff. This will be done, in part, by continuing to use the Cannon Financial Institute teleconferencing program, the Bank’s website, targeted media campaigns and a new outreaching to Bank clients’ through hosting topical seminars. Along with trying to maintain our fee income through increased new business development, it remains incumbent upon us to continue to contain our overhead costs during the year. To that end we have been reviewing all of our third party relationships to determine if costs can be further discounted by contract renegotiation or streamlining the services provided. Some of the areas already reviewed have been our SunGard Trust accounting system, Bank of New York Mellon custody platform and Thomson Reuters Fast Tax Service. We will still be reviewing our mutual funds settlement system, pricing, and model/performance measurement systems for further savings.
The uncertainty in 2009 and for the years ahead is broad and deep. How will Congressional efforts to bail out large banks and companies affect us? Will community banks like ours be unfairly burdened as subsidies are awarded to those large institutions that created this financial mess? To what extent will unprecedented federal deficits and the national debt hamper the economy in the future…do we prepare for extended periods of deflation or inflation? As Congress and the Treasury map out a “new era of financial market regulation,” how much more regulation will be imposed upon well-run, well-capitalized community banks like ours that have always been highly regulated by both state and federal agencies? The financial cost and human resource drain for regulatory compliance is already very burdensome to a small bank like ours.
The Bank’s recent ability to remain strong has been the result of our 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. With this same commitment I am sure we can weather these future uncertainties; thus, our current advertising says:
“Here Today. Here Tomorrow. That’s what we’ve been saying since 1877.”
Jay S. Gibson