ANNUAL REPORT 2014
As you will read in this annual report, 2014 was another successful year despite the head winds created by continued low interest rates and ever increasing regulatory burden. Also, new milestones were reached as 2014 came to a close, including anniversaries and record business levels.
This year marks the 25th anniversary of the Kids’ Bank and the 20th anniversary of the Trust Department. The Kids’ Bank window was created in 1990 to provide children their own teller window to conduct transactions. We have many families that enjoy coming in on Saturday mornings to deposit the children’s allowance, birthday money or money they earned doing chores. It is a fun and interactive way to teach children important fiscal lessons that will last a lifetime. In celebration of the anniversary, the Bank will be hosting events throughout the spring and summer months including participation in Pro Portsmouth’s Children’s Day and participation in a national initiative called Teach Children to Save Day, an outreach program, in conjunction with local schools, that teaches children the importance of saving.
New all-time highs were achieved for net loans in the Loan Department and assets under management in the Trust Department. The loan portfolio has doubled over the past ten years, while the Trust Department has seen similar growth. This growth is a testament to the high level of customer service and the reputation of the Bank.
The Bank has reached for yield in this low interest rate environment by investing in securities and mortgages with slightly longer maturities or rate lock periods; however, the Bank’s balance sheet continues to be well positioned for when the tables turn and interest rates begin to rise.
At the beginning of 2014, the Board and management hired The Long Group, a banking and insurance industry consultant firm, to conduct a study of the Bank’s market area. The Bank will be exploring options to meet facility space needs over the next couple of years, but before we invest valuable resources into a renovation project, it was important to understand whether our one office retail banking model is sustainable. The study allowed us to gain a better understanding of the geography of the Bank’s primary market area, the demographics of the market and our customers, and evaluate the total demand for financial services within that market area.
The results showed that the Bank has an opportunity to deepen its account relationships with existing customers while at the same time target those new customers most prone to bank with PSB. With a better understanding of our customers we will be better prepared to tailor products and services to meet their demands. With the use of technology products, such as online and mobile banking, the Bank will be better able to develop customer relationships with those that reside in the outskirts of our market area.
In the past, the Annual Meeting of the Corporation was held in the morning. This year, it was decided to try an evening meeting to better accommodate those Corporators that have work conflicts and provide an opportunity for you to meet all of the Bank’s officers. Even though the meeting is being held in the evening this will be a Corporator only meeting. We will attempt to schedule a Corporator Social for later in the year when spouses and guests will be welcome. We look forward to seeing you all at the meeting.
Richard M. Wallis, President/CEO
David H. Bryan, Treasurer/Financial Officer
The year ending 2014 was another good year with respect to the Bank’s financial performance. An improving asset composition on the Balance Sheet was the highlight of the year. Robust loan portfolio growth helped maintain reasonable earnings in a continuing brutal interest rate environment for the financial services industry. Interest rate gains on the yield curve at five years and longer held fairly well during the early part of the year but were largely given back in the waning months of 2014. Management was able to augment the loan portfolio through continued underwriting of a very popular 10/1 adjustable-rate mortgage product. Deposit growth was anemic for the year but better than the modest contraction experienced in 2013. The growth in Loans of over $10 million was funded largely by a shrinking investment portfolio (maturities and sales) and a reduction in cash. Management is pleased with the rebound in lending in terms of serving the community and maximizing the generation of income. Economic indications nationally and locally appear to be signaling some traction with respect to expansion. Consumer confidence has rebounded substantially, and businesses appear to finally be investing again. Wage growth is still lagging, and fewer people are participating in the labor force; however, a slower pace of growth appears sustainable- including in the slow to heal housing and construction sectors. The stock market has continued to perform reasonably well, and the Bank is likely losing some deposit funds in that direction. Having said that, it was another strong year for checking and savings account balances. These types of accounts can help build relationships over the longer term and often stem from a mortgage offering to a new customer.
A positive evolution on the Balance Sheet with regard to asset composition and somewhat better interest rates for the better part of the year led to a resurgent Net Interest Margin. In controlled fashion, management has extended the duration of some of the Bank’s loan and investment holdings. The search for yield has prompted some in the industry to take on more credit risk. Bank management has chosen to selectively deploy funds into some longer-term assets. There is some interest rate risk associated with this practice, but asset/liability modeling tells us it is measured and well within prudent parameters. Non-interest revenue was largely in line with the previous year thanks in part to burgeoning assets under management in the Bank’s Trust Department. Shrinking gains taken on fixed-rate loan sales were replaced by increased revenue from the fiduciary area.
Management did well to maintain operating expenses nearly level with the preceding year. An improving Net Interest Margin helped reduce the Bank’s Efficiency ratio from 82 cents to 78 cents (the amount required to generate a dollar in revenue). A continuation of strong fiduciary fee income bodes well for the Bank’s efficiency as well. Overhead is further mitigated by a no-branch operation. Another strong earnings year combined with little increase in Total Assets enabled the Bank to augment an already strong Capital ratio in excess of 17%. For regulatory reporting purposes, the ratio exceeds 17.5%. Most financial institutions operate with more leverage, or a lower Capital ratio, for the benefit of shareholder returns. At Piscataqua Savings Bank, the Capital accounts are viewed as the foundation of the financial base that enables the Bank to continue serving depositors (owners) and the community at large. That formula is helping to launch the 138th year. As you continue reading on in this Annual Report, please take note of the positive position depicted in the financial charts regarding the Bank’s Balance Sheet and Earnings.
Debra S. Perry, Vice President/Senior Loan Officer
What sets our Loan Department apart from others: excellent customer service, experienced loan officers and loan support personnel, the ability to underwrite, process, originate and service our own loans, excellent team work and the longevity of our employees that creates longtime relationships and consistency for our customers. I am very proud of the Loan Department and the challenges that they face every day. Everyone in the Department is cross-trained and wears many hats; unlike other lending institutions that have an underwriting department, a loan processing department, originators and a servicing department. There are only six individuals, not including myself, that take on these tasks every day. This small department originated 124 loans in 2014 for a total of $36 million and grew the loan portfolio by $10.8 million. In addition, they have to keep up with the onslaught of new loan regulations that have taken effect and the pending ones still to come. It remains to be seen whether some changes will need to be made in the Department because of the regulatory burden.
New home purchases made up the biggest part of our origination activity in 2014 as it represented nearly 75% of our total originations. I am excited to share that for the year 2014, we were #1 in total purchases in the City of Portsmouth, when compared to over two hundred and fifty (250) other lenders, according to Real Data Corporation©. This is a company that surveys other lending institutions and compares our loan activity to theirs in surrounding towns in the Seacoast area. Overall, we were 5th in total loan purchases in the Seacoast area. According to the New Hampshire Association of Realtors (NHAR), Rockingham County real estate sales of single family residential homes totaled 3,460, down just four sales from 2013. There was a 5.4% increase in the median sales price from $275,000 in 2013 to $289,900 in 2014. Prior to the mortgage crisis in 2007, the median sales price in 2005 had reached a high of $337,500. NHAR calls 2014 a year of stabilization, with unit sales down just slightly and median sales prices ahead slightly.
The Bank’s mortgage delinquencies, thirty days or more past due, were .85% of total mortgage loans on December 31, 2014, which is an improvement from December 31, 2013. Overall, delinquencies remain very manageable at the Bank. The State of New Hampshire’s mortgage delinquency rate at the end of December 2014 was 5.7% and the national mortgage delinquency rate was 6.71%, both showing improvement from 2013. The Bank experienced one foreclosure in 2014. We are fortunate that we are able to work with most of our delinquent borrowers and set up mutually agreeable repayment plans for them. In comparison, according to data provided by New Hampshire Housing Finance Authority, the total number of foreclosure deeds in the State of New Hampshire for 2014 was 2,074 which was essentially equal to the number recorded in 2007. December of 2007 was the official start of the Great Recession in the United States according to the National Bureau of Economic Research. In addition, 2014’s total foreclosure deeds in New Hampshire were 47.5% lower than the 3,953 recorded in 2010, the greatest number of foreclosures in a calendar year during this cycle.
Numerous changes have impacted compliance efforts due to amendments enacted under the Dodd-Frank Act that went into effect on July 21, 2010. In 2014 we dealt with the new Qualified Mortgage and Ability to Repay rules (QM/ATR) that changed the way we qualify our borrowers for a mortgage loan. Currently, we are bracing ourselves for the most monumental change of all that takes effect on August 1, 2015, the Integrated Disclosure Rules. The end result will combine the Good Faith Estimate (GFE) and initial Truth-in-Lending disclosure (initial TIL) into a new form, called the Loan Estimate. The HUD-1 and final Truth-in-Lending disclosure will be consolidated into another new form, called the Closing Disclosure. These changes are designed to provide information that will better assist consumers in understanding all of the costs of the transaction. Management has been and will continue to spend a considerable amount of time preparing for this next round of changes.
Through it all our greatest goal is to remain true to our mission by continuing to fulfill the credit needs of the Greater Seacoast community.
Joan W. Gile, Executive Vice President/Operations Officer
The Operations Department has been continuing to focus on technology and the changing trends in banking. A new ATM was installed early in 2014. This machine is state-of-the-art with voice capability for the visually impaired. It will also place an image of a check being deposited on the receipt. There has been a steep learning curve for both customers and employees on the use of the machine. There will be additional changes coming as we prepare for EMV (Euro MasterCard Visa) chip card technology that will be implemented for debit card issuances in the near future. EMV cards will contain microchips that cannot be duplicated which will help reduce debit card fraud.
Most American adults carry a mobile phone and cannot remember how they managed without one. It only makes sense that the popularity of mobile banking is on the rise. Much of 2014 was devoted to the development of the Piscataqua Savings Bank custom mobile app. Customers have downloaded the apps on over 600 IPhone, Tablet and Android devices. These customers have 24/7 access to account information as well as the ability to transfer funds and pay bills. You can even deposit a check using the app with your phone’s camera. With mobile banking, our slogan “You Go, We Go With You” sums it up.
By way of comparison, in 2004 there was an average of 1,850 log-ins by 208 customers per month to online banking. The average number of log-ins in 2014 was over 9,200 by 1,000 customers, representing a nearly 400% increase over the 10 year period. The security and encryption technology used in online banking makes it very safe. Meanwhile, online bill pay also continues to gain popularity. Surveys conducted by the Federal Reserve Bank of Boston indicate that 62% of bills were paid by check in 2002 and today that is down to 10%. Online bill pay is fast and easy and can help protect against identity theft. Less paper means less chance your information gets into the wrong hands since electronic payments do not contain any of your personal account information. Monitoring accounts online for unauthorized transactions helps to further protect against fraudulent transactions.
All of these electronic banking options are offered in addition to our traditional banking services. We strive to offer choices that best serve individual customers’ needs. We value customer service and recognize the importance of having experienced and knowledgeable staff in the Bank. To further strengthen our customer service, we have created a new position to support the Deposit Operations Department. Our new eServices Specialist will be there to help with questions regarding the eServices suite of products.
Trust/Investment Department Report
Kathleen N. Donovan, Vice President/Trust Officer
Welcome to our Department’s 20th year as part of the PSB family! In 1995, a bold team of supporters within the Bank and in the community embarked on the huge undertaking of applying to the State of New Hampshire for trust powers and renovating space for a new department to provide trust and investment services. Imagine how many meetings must have occurred to bring this idea to fruition – we thank those who were instrumental, many of whom are still part of the PSB family today.
This is a perfect time to take a step back to evaluate where we have been, where we hope to go and how we are doing on this journey. The table below shows how the assets under management have grown through the years. (This reflects a net result of new business, deceased clients, trust distributions or terminations and market appreciation/depreciation):
In 1995, a staff of five ended the year managing 93 accounts valued at $46 million. As of December 2014, our current team of nine is managing 380 accounts valued at over $250 million, and 2014 will be remembered as the year we surpassed the size of the Bank (a proud accomplishment for all!). The estate tax laws and exemptions have changed over these years as well. In 1995 the exemption was $600,000, whereas today it is at $5.43 million (indexed for inflation) with a much smaller percentage of the population being impacted.
We have completed a busy year of transition with the retirement of Dick Kaiser and MaryAnn James (the last of the original team from 1995) while I assumed a new role. Laura Prescott, Certified Trust & Financial Advisor, has embraced many of Dick’s clients as well as her own. John Fredette and his assistant, Corey Boucher, Chartered Financial Analysts, have enhanced the investment portfolios with strategic asset allocation and diversification while taking advantage of system upgrades and efficiencies. Gail Armsden, Joanne Ouimet, Heidi Byers, Macey Roberge and our latest addition, Sarah Briolat, complete our dedicated operations and trust administrative support team and are to be congratulated for their roles in making our systems work and our clients feel supported. It takes a village!
Technology has also changed the way business is conducted from a compliance and documentation perspective. Regulatory, legal and tax changes make it more complex each year and we appreciate our network of local attorneys, accountants and other team advisors. Continuing education and ongoing training are important components of this process in order to maintain certifications and to stay abreast of ever-changing rules and requirements. Sarah Briolat will be attending a week-long session in Charlotte this April to provide a solid foundation for her new role as Trust Operations Assistant. Web-based and off-site educational opportunities are supported to enhance knowledge, confidence and skills. Our ongoing Cannon Teleconference Luncheon Series presented by national attorneys provides a valuable resource and networking opportunity as we invite local advisors, while receiving continuing education credits for our specialties.
As part of this Annual Report, Treasurer Bryan provided two Trust charts which include information about our assets, fees, expenses and net income for 2014. In a year of transition and technology upgrades, we held on to a net positive of $138,857 out of $1.6 million gross income. Our profile demonstrates our thoughtful approach to the growth within the Department, maintaining a consistent number of accounts in relationship to our ability to provide services:
380 accounts (170 relationships)
12/31/14 market value: $250.67 million
Average account size: $660,000 Types of accounts: 37% fiduciary / 56% investment / 7% custody
TRENDS, IDEAS AND EXPECTATIONS: First and foremost, we plan to continue our model of providing personalized services with each client’s best interests in mind. The lack of a sales culture allows us to focus on clients while maintaining a highly competitive fee structure, still being mindful of our important contribution to the Bank’s bottom line.
Rollover IRA accounts are increasing rapidly as workers and retirees become solely responsible for their own retirement funds as pensions become a luxury few will receive. People are living longer and relying on their savings well into their nineties and even past 100 in many instances. Long-term care considerations are very real, often without close family members to help in a meaningful way. Avoiding guardianship and having trusted, bonded and regulated management of funds during periods of incapacity and beyond are critical factors for many. We all benefit from financial planning, creating budgets, setting goals and objectives, and coordinated tax planning. Understanding risk tolerance, liquidity needs and other factors are key considerations in setting the appropriate investment objective.
It is expected that the largest transfer of wealth in history will occur between the baby boomer generation and their children. We have Gen X, Gen Y, iGen – a whole new lingo and set of personalities in our future clients, complicated by a wide spectrum of increasing special needs, autism, addiction, spendthrift and custody issues. The methods for communicating will change dramatically as we shift into new generations. We all have unique backgrounds and expertise and cannot generalize, but women often outlive men and create their own wealth and have great strengths in understanding their family’s needs, but may lack the background or comfort zone for managing investments. Our comprehensive services and team approach work well with families through the generations in helping to fill gaps as needed.
Generally speaking, the future is bright for a boutique Trust Department like ours. We have our niche and can work closely with families and focus on what we do well without the burden of high-pressure sales goals. The large institutions (and those banks that have become part of large institutions through mergers and acquisitions) have moved their services out of the area and their model is not resonating well with families. We appreciate our local presence, referrals from our local professionals and existing clients, and the complementary role we play within our PSB family.
John P. Fredette, CFA/Trust Investment Officer
After a terrible winter, the remainder of the year was relatively robust as the majority of domestic economic indicators grew in stride. The S&P 500 Index returned 13.7% for 2014, while the Barclays Aggregate Bond Index gained 5.97%. To the surprise of many investors, long bond yields defied all expectations of a parabolic increase and instead declined on a global basis. Outside of the U.S., equity markets were less favorable as the MSCI ACWI ex U.S. (a non-U.S. stock index) ended down 3.87% for the year. In the latter half of the year consumers received an early Christmas gift, low oil and gas prices. While this will impact capital expenditure budgets and revenues for select firms, the positive impacts of a decline in such an important natural resource far outweigh any negatives. The fact that the consumer may end up saving more of this windfall is even more constructive for our projected imbalances.
This savings trend may be one that is here for the long-term as the baby boomers realize there is less income available and the Millennials finally understand social security and other safety nets are a Ponzi scheme, pardon my Italian.
Shifting to fixed income and trading my glasses for a magnifying glass will hopefully provide a more prescient estimate of short rates. My estimate last year of rising short-term interest rates in early 2015 may be slightly delayed to the latter half of this year at the earliest. The supply/demand imbalance present in the bond market is truly extraordinary. The long end of the curve is held captive by non-price sensitive entities such as: pension funds, insurance companies, sovereign wealth funds and central banks. Also, the Federal Reserve will likely be forced to sit on its hands a little longer given the tightening effects of a strong dollar and lower than estimated inflation. These dynamics may hold the long end of the curve down when short rates eventually rise. Ultimately, rising interest costs along with wages will have a negative effect on balance sheets. While this risk is pushed out a bit further, I will reiterate my statement from last year, “while corporate and household balance sheets are stronger, the next deleveraging cycle may be one of government deleveraging.”
While 2014 ended favorable for U.S. growth and corporate profits, the tide may be turning as we encounter some headwinds and a tightening cycle. Indicators outside the U.S. are currently more encouraging and help solidify the case for global diversification. Monetary policy is likely to become more fragmented over the years, which could result in destabilizing shifts in capital flows and currencies.
To summarize, it is important to recognize where we are in the economic cycle. Given the current and expected data, we estimate the U.S. is transitioning to the late stage. Investors should understand the reward/risk available at this stage, which is not as large as what is available near the bookends of the cycle and adjust their investment profiles accordingly.