ANNUAL REPORT 2009 - Piscataqua Savings Bank

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This past year epitomized the significant importance of a bank like Piscataqua Savings to its community. Few times in history has the public been as angry at the “big banks.” Most consumers may not understand the specifics of what happened to cause the financial crisis, but they have become much more aware that local banks operate in their best interest and bring economic stability to their community.

During this past year of distress in the financial services industry, Piscataqua Savings was the beneficiary of unprecedented growth in every area of services that we provide to our customers: deposits, loans, trust services, and investment management. While most institutions were focused on problem loans and investments, Piscataqua Savings was able to concentrate on establishing relationships with new customers and providing a greater variety of services to our existing customers. These new and renewed customer relationships are very important to the future strength of the Bank.

The Bank’s performance and accomplishments during 2009 were truly outstanding. I hope you will take the opportunity to read the following summaries by our senior officers of the positive results we experienced in each of their respective areas of the Bank.

Financial Results

Troy E. Neff, Treasurer/Financial Officer

Balance Sheet:

Total assets increased by over $13 million from year-end 2008. Most significantly, the loan portfolio increased by $20 million. This growth was funded by increased deposits from new and existing customers moving their money to a safe, locally owned and operated community bank. Total deposits increased during the year by $13.2 million. The securities portfolio decreased by $6.5 million and cash decreased by $647 thousand from year-end 2008 to further support the Bank’s extraordinary loan growth.

The Bank held no securities which required any valuation write-down. The investment portfolio consists almost exclusively of non-callable US Government Agency bonds with stated maturities of three years or less.

The Bank’s capital position remains one of the strongest among all banks in New Hampshire. As a mutual bank, we do 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 reinforce our business model in providing very personal banking services to local individuals and families. The Bank’s capital by year-end had increased by more than $1 million.


The Bank’s net interest margin increased over the prior year as a result of the significant increase in the loan portfolio as well as by having the expense for interest on deposits decline faster than the decreasing yields on the loan and security portfolios. The level of net earnings produced by the Bank is proportionate to the strength of the net interest margin. Net interest income surpassed 2008’s level by $879 thousand.

Non-interest income of $1.4 million in 2009 was behind 2008 by only $41 thousand. These results are much better than anticipated as the Trust Department was successful in growing their account base to offset prior declines in market value.

Overhead expenses increased from $4.8 million in 2008 to $5.3 million in 2009. This increase was proportionate to the increased size of the Bank. Salaries, employee benefits, data processing, and other administrative expenses, including $218,000 of expensed FDIC assessments represented the most significant percentage of the increase. Included in this report is a new graph showing the trend of the Bank’s net income and its efficiency ratio. The efficiency ratio measures the cost to generate each dollar earned. The Bank’s ratio for 2009 was 75.21% meaning it cost the Bank $0.7521 for each dollar of net income earned. This metric has been a key factor in the Bank’s financial stability achieved primarily due to the lower cost of having a single-office location and having efficient and experienced employees.

After-tax net profit increased from $889 thousand in 2008 to $1.09 million in 2009. These earnings exceeded the Bank’s rate of growth and continue to further strengthen the Bank’s strong capital position.

Lending Results

Richard M. Wallis, Executive VP/Senior Loan Officer

During 2009 US banks experienced the largest decline in lending since 1942. According to the FDIC, US lending volume declined by 7.4%, eclipsing even the results during the 1991 recession. The decline in lending was, in part, due to the effects of the economy on banks, businesses and consumers. Some banks were forced to reduce lending to address problem loans and to increase their capital positions. Many needed to strengthen loan underwriting standards making it more difficult for borrowers to qualify for new loans. Business borrowing demands were reduced during a time of economic uncertainty and weak sales volumes.

Consumer confidence was at the lowest point in decades postponing the purchases of automobiles and other consumer goods; therefore, reducing the demand for loans and credit cards. Consumer confidence was largely affected by the loss of jobs during 2009. Unemployment increased throughout the year resulting in fewer households and businesses that could qualify for loans. The national unemployment rate was 10.6% at year-end 2009. New Hampshire’s rate was less severe at 6.7%.

Despite the national decline in lending activity, Piscataqua Savings was actively generating the largest loan volume for any year in the history of the Bank. Last year’s mortgage originations totaled $80.6 million. To put this in perspective, the 2009 mortgage loan volume was more than for 2006 and 2007 combined, and $23.6 million more than the record volume of loans originated in 2008. By the end of 2009 the Bank’s loan portfolio had grown by 15%. Piscataqua Saving’s lending directly impacted our local economy. Those dollars went directly to Seacoast residents to purchase new and existing homes or to refinance their mortgage loans making home ownership more affordable.

According to Real Data Corporation, Piscataqua Savings Bank was the eighth largest mortgage lender in the eight communities of Greenland, Hampton, North Hampton, New Castle, Newington, Portsmouth, Rye, and Stratham. The Bank had a 2.77% market share of the dollar volume of mortgages made in 2009, surpassing all other local lenders. The Bank’s ranking and market share was very strong considering there were literally hundreds of institutional lenders that provided mortgages in our market area.

In addition to record mortgage lending, the Bank also originated an unprecedented number of home equity lines of credit. Originations of home equity lines of credit totaled $9 million. Many borrowers use this type of financing for home improvements, financing purchases such as automobiles or children’s education. During the latter part of 2008 and into 2009, borrowers also used home equity lines of credit to supplement retirement income. Many retired individuals had experienced significant losses in their retirement investments, such as IRA’s and 401k’s in 2008. Retirees, wanting to allow their investments to recover, decided to use the flexibility of a home equity line of credit as a cash management tool allowing time for some recovery in the stock market.

While nationally the number of foreclosures increased during 2009, NH foreclosures actually declined by 3% as tracked by the NH Housing Finance Authority (NHHFA). NHHFA reported there were 3,467 foreclosure deeds recorded in NH in 2009 while there were 3,563 recorded in 2008. NHHFA speculates that this decline was due to mortgage lenders’ continuation of loan restructuring and forbearance with borrowers. NHHFA surveyed those homeowners that received foreclosure auction notices to determine the main causes for the high level in mortgage delinquencies. Of the 788 surveys 65% of these homeowners had purchased their homes since 2000 and the rest prior to that year. Not surprisingly, the major causes of the delinquency problems were job loss or reduction of household income (29.5%) and decline in property value (16.7%). Foreclosure rates will remain at these high levels until delinquencies are brought under control. We are pleased to report that Piscataqua Savings had no foreclosures during 2009.

Delinquency rates (thirty days or more past due) for residential mortgage loans skyrocketed nationally to 10.80% of total mortgage loans. This rate of delinquency was up by 3.75% over the previous year and by 7.49% over 2007. Piscataqua Savings Bank’s delinquency rate at year-end had increased minimally from 1.11% to 1.24%. This very low level of delinquencies presented a unique opportunity for the Bank’s lending staff to focus its efforts on new loan origination.

A significant contribution to the Bank’s success in last year’s loan originations was the addition of two new loan officers to our loan department team. MaryEllen McKenney comes from a banking background and had been a Senior Loan Officer for GMAC Mortgage. MaryEllen also has an extensive background in the real estate industry having worked in real estate sales and as the Finance Director for The Housing Partnership. Rick Page also comes to us with an excellent reputation and an extensive history of home mortgage lending in New Hampshire. Rick previously worked for Ocean Bank and its predecessors as a Mortgage Loan Officer. MaryEllen and Rick bring a wealth of experience to our Loan Department.

Deposit Operations and Compliance Results

Joan W. Gile, Sr. VP/Operations

The effects of the financial crisis in 2008 carried over into 2009 and customers continued the “Flight to Safety” primarily seeking security rather than higher interest rates. Many consumers realized the value of community banks for their adherence to safe and sound banking practices as well as the commitment to the area in which they are located. Piscataqua Savings benefited from this trend and the impact on deposits was favorable. Over 299 new customer relationships were built in 2009. This compares with 280 in 2008. Total deposits grew from $159 million as of December 2008 to $172 million by year-end 2009 representing 8.31% growth. The growth was primarily in money market and savings account deposits. Total money market accounts increased by $5.3 million or 19.77% and savings accounts increased by $4.2 million or 18.37%. Total certificates of deposit increased by almost $2 million or 2.30%.

The Bank experienced growth in all electronic banking services. In December we connected our 1000th customer to our online banking system. Customers conveniently and safely monitor account activity, transfer funds and pay bills. During 2009 we averaged 15,500 account inquiries each month. Additionally, online banking customers transferred funds between Piscataqua accounts over 800 times per month. More than one third of the online banking users take advantage of online bill payment services as a very quick, safe and easy way to pay bills.

While online banking is quick, convenient, and safe, we still value the personal face-to-face contact with our customers. In 2010 we plan to improve our customer service experience by adding another customer service area at the parking lot entrance to the Bank.

The crisis in the financial industry has increased the focus on consumer protection regulations. While Congress debates the issues to determine the most effective way to protect consumers, we already devote substantial amounts of time and resources to ensure compliance with current regulations. In July, the FDIC completed Compliance and Community Reinvestment Act (CRA) examinations at the Bank. The compliance exam covered three major components: board and management oversight, our compliance program and compliance audit. Although FDIC regulations prohibit publication of our actual ratings, the Bank had no significant issues of compliance which needed to be addressed. The CRA segment evaluated the Bank’s record of meeting the credit needs of our community, including low and moderate income individuals and families. The FDIC publicly rates the results of all CRA examinations, as follows: Outstanding, Satisfactory or Needs Improvement. The FDIC rated the Bank as “Outstanding.” At the time of reporting the Bank’s examination results, the FDIC announced that nationally there were 89 examinations during this period. Piscataqua Savings was one of only two banks in the country to receive an “Outstanding” rating.

Piscataqua Savings supports the ongoing educational efforts of our employees. Assistant VP/Information Technology Officer Antone Cabral is currently attending the New England School of Financial Studies. During the School’s twelve month schedule there are two one-week sessions held at Babson College in Wellesley, MA and five written assignments. The first session was an intense week focused on asset/liability management, interest rate forecasting and strategic planning. Other sessions include lending, marketing, and the human resource function.

Trust/Investment Management Results

Richard G. Kaiser, VP/Senior Trust Officer

The Trust Department’s results for 2009 were better than anticipated or expected. At the beginning of the year we projected that 2009 would be an extremely difficult year, not only for the U.S. economy, but also for global economies and their equity, bond and money markets alike. Throughout 2009 we continued to see deleveraging of the housing, financial and credit markets which had begun as far back as mid 2006. During the first nine weeks of 2009, our projections held true as the virtual disappearance of liquidity in the markets and investor’s continued aversion to risk drove all markets downward. However, after March 9th when the markets bottomed (capitulated), the economy and investor’s confidence started to turn around due in part to the massive injection of fiscal and monetary stimulus that had been provided during 2008 and early 2009 by the US Treasury and the Federal Reserve. As a result, capital markets started to thaw and positive earnings projections were being announced for the first time in a year. Large money center banks and brokerage firms were able to tap into the capital markets to shore up their balance sheets and began repayment of TARP funds. Although in March we were still deeply amidst the recession, investors decided to reenter the markets and take on greater levels of risk. From March until the end of December we saw strong advances in both the equity and fixed income markets with the S&P 500 returning 26.4%, the Dow Jones Industrial Average 22.6%, the NASDAQ 45.3%, and the MSCI Emerging Markets returning 78.5%. In the fixed income markets, Treasuries fared poorly during the year with negative returns on short and long bonds (-2.2% and -12.19%, respectively) while very strong positive performances came from longer maturity/lower quality issues of corporate high yield bonds (junk bonds) at 58.2%, and commercial mortgage-backed assets at 28.4%.

Robust performance in the markets and very strong new business development procurement stepped up the total market value of assets managed by the Trust Department to a new year-end high of $154.1 million, a $19.7 million or 14.6% increase over the end of 2008. Of this increase, $5.2 million or 26.5% was a result of the markets’ rebounding after March 9th and $14.5 million or 73.5% was attributable to new business growth. The total number of accounts managed grew to 374 from 350, a 6.9% increase.

The significant growth in new business was due to solid referrals from existing clients, Bank Trustees and officers, as well as local attorneys, CPA’s and other professionals.

Increased market value impacted the Department’s income positively as revenues were $1.12 million, 18.5% over budget and slightly higher than 2008. Expenses for the Department were $30,863 or 3.0% less than budget. After-tax net profit was $90,037; down $24,590 from 2008.

During 2009 we activated Portfolio Account Link platform (PAL) to our trust accounting system allowing our clients the ability to view their account’s portfolio and transactions online. This not only affords our clients greater convenience, but in many instances also lowers our costs by eliminating the preparation, handling and mailing of paper statements.

We believe that in 2010 the economy (GDP) will continue to grow at 2½% to 3%, inflation will be benign and the Federal Reserve will continue their accommodative monetary stance by keeping short-term interest rates low until, perhaps, the end of the year. New business development, albeit not as robust as 2009, should continue at a solid pace as prospective clients seek the advantages of a locally operated bank and trust department and as a result of further consolidation in the banking and trust and wealth management arena.

What’s Ahead?

There will continue to be great opportunity for the Bank to differentiate itself from other banks and financial service providers. Local individuals have an increased appreciation for the Bank’s commitment to its customers and the community. The Board of Trustees and management’s role will be to identify those risks which might jeopardize the future viability of the Bank. Anticipated legislation to be passed by Congress may unintentionally create undesired results in various ways: a) by imposing the same regulatory environment on small banks as on large which disproportionately burdens a bank like ours – even though banks like Piscataqua Savings did not participate in the activities that put the stability of the entire financial industry at risk; b) by not adequately addressing the “Too Big to Fail” concept that benefits large institutions and lowers their cost of doing business; c) by continuing to allow credit unions to operate at an overwhelming competitive advantage of offering almost all of the sophisticated consumer financial services as a bank yet, remarkably, remain exempt from payment of any federal income taxes (unlike other businesses or you and I!).

Our goal continues to be the same. Conduct business based upon strong values, keep a focus on providing exceptional service to our customers, and keep our business truly local so that we can have a very positive impact on the level of service we provide.

Jay S. Gibson