ANNUAL REPORT 2017
In conjunction with the building renovation, a Historic Committee has been formed to discover, preserve and display the Bank’s past. The cover to this report is an example of some of the discoveries and is appropriate that it shows an advertisement when the Bank first moved into 15 Pleasant Street in 1925 with the tagline, “An Old Bank in a New Home”. The same will be true when the 2018 renovation project is complete. More about the work of the Historic Committee will be presented at the Annual Meeting.
It has been a long and slow economic recovery since the financial crisis of 2007-2008, but we did see some improvements during 2017. The Federal Reserve continued to raise interest rates with three increases during the year based upon positive job growth and early signs of inflation. The stock market remained strong which brought with it an increase in consumer confidence.
Closer to home, Piscataqua Savings Bank also continued to see improvements. Deposits grew at a 3.47% rate. The loan portfolio grew at a 14.33% rate, exceeding all of our expectations despite a low housing inventory in the Seacoast. New financial products were introduced in an effort to stay relevant with consumer preferences. New milestones were met in the Trust area, all while planning for a smooth transition of the Senior Trust Officer position from Kathy Donovan to Tom Queeney due to Kathy’s retirement. The building renovation project was kicked off in October and is progressing well. Onetime adjustments to income and capital were made due to the Tax Cuts and Jobs Act that was signed by the president on December 22, 2017. All of this and more will be outlined for you in this report.
Since 2011, when Dodd-Frank was enacted, new regulations impacted not only the largest banks that contributed to the financial crisis, but regional and small community banks as well. Despite good intentions by legislators to make sure a financial crisis never occurs again, the one-size-fits all Dodd-Frank Act had unintended consequences. On a positive note, legislators have realized how some of the regulations have hampered the economic recovery. The House Financial Services Committee put forth the Financial Choice Act which passed the House 233–186 on June 8, 2017 with provisions that would correct some of the over regulation promulgated by Dodd-Frank. In 2018, the Senate also passed the Economic Growth, Regulatory Relief, and Consumer Protection Act which has similar provisions as the house bill for making commonsense changes to the Dodd-Frank Act. It is our hope that these bills will be reconciled into a regulatory relief bill that the president will sign later in 2018.
Change is inevitable. Regulations will come and go, margins will go up and down, and building renovations will change the customer experience; but the one thing that will never change is delivering great customer service. Our staff prides themselves on the high level of service that they provide and they truly care about our customers; this is what makes all the difference between us and the competition.
Richard M. Wallis, President/CEO
David H. Bryan, Vice President/Treasurer
National economic conditions chugged along during the first half of 2017 on decent fundamentals carried primarily by a healthy labor market. Some of the bloom came off the rose in the honeymoon relationship between the financial markets and the newly-elected Trump administration. The inability to secure a major legislative victory with respect to healthcare and fiscal stimulus along with geopolitical tensions in the Middle East and on the Korean peninsula helped to support prices in the bond market and keep yields in check. The ten-year Treasury note peaked at 2.62% in mid-March but spent the next six months in a range mainly between 2% and 2.3%. The Note did spend several days in June below 2% going as low as 1.95%. On the heels of a solid third quarter corporate earnings season and signs of potential tax reform, bond prices came under pressure again in October with yields back above 2.3%. The stock market continued its torrid pace fairly consistently throughout the year. A change in leadership at the Federal Reserve occurs in 2018. Janet Yellen will give way to Jerome Powell. Mr. Powell has signaled a pro-growth policy mindset along with similar thinking on monetary policy that should mean continued accommodation through a gradual rising of interest rates. Nonetheless, there has been a tremendous flattening of the yield curve as the market continues to be skeptical of long-term economic growth taking off despite 3+% readings on growth in gross domestic product during the second half of 2017. Some economists expect a near-inverted to possibly inverted yield curve in 2018 as the market prices in three more short-term rate increases from the Federal Reserve.
The year was another solid one for deposit growth (despite a soft fourth quarter) with premier money market accounts leading the way and a small resurgence in certificates helping to support a larger balance sheet. Transaction and savings accounts suffered some run-off. Growth in the loan portfolio was the most notable trend within earning assets and on the balance sheet in general. Much of this growth was accomplished through the development of correspondent relationships which have become critically important in an ever increasing competitive environment in the seacoast area. Loan balances increased over $21 million! The challenge of putting money to work in the securities arena was certainly alleviated by the healthy loan origination activity. A shrinking investment portfolio during 2017 may well continue in 2018 dependent on deposit funding as the Bank pays out the approximately $6 million necessary for the renovation project. With some substantial reduction in the municipal segment, management has room to invest here but will watch carefully for the impact of proposed tax legislation impacting this market. Cash-flowing mortgage-backed securities are another option under-utilized in the portfolio as currently constructed.
In terms of earnings, a substantial shift in earning asset composition helped off-set increased operating expenses associated with a large renovation project occurring on all three floors of the Bank’s main (and only) office. Moving costs and rent consequent to relocating staff into temporary space were the main culprits in the increased expense related to bank premises. Another very large operating expense variance in 2017 was the payment of fees to mortgage brokers being used to help drive loan origination. Net Interest Income rose to a level not seen since 2010 and non-interest income was bolstered by Trust Department fees reaching record levels on assets under management that crested $300 million. Moreover, management purchased an additional $5 million of bank-owned life insurance that is providing a better than 4% return. Management did well to keep salary/benefit escalation under control; however, the additional Total Income was not enough to completely off-set the increased overhead noted above, and the resulting bottom line Net Income was modestly lower than 2016 net of a large year-end adjustment related to the passage of the Tax Cut and Jobs Act. Like most other financial institutions, the Bank had to take a large one-time charge to adjust a deferred tax benefit on its books. Management continues to be hopeful with respect to a positive impact on Net Interest Income in the near to intermediate term through the rate environment and changing asset composition. The Bank’s model of delivering personal service with a landmark local presence still resonates in the Port City and surrounding towns. Examinations and audits deem the Bank to be meeting the highest regulatory and accounting standards.
Debra S. Perry, Vice President/Senior Loan Officer
A very busy and successful year is how I would sum up lending results for 2017. With total portfolio originations of $59.5 million and lower turnover than in prior years, our loan portfolio grew by $21.6 million. A major contributor to this success was our correspondent loan program. We currently have correspondent loan relationships with four local mortgage companies. These companies reach out to us when they have a borrower who doesn’t meet secondary market guidelines but would be a good candidate for one of our adjustable rate mortgage (ARM) programs. We underwrite these loans and approve them prior to closing but, the correspondent actually closes it in their name. Once the loan closes, we then purchase it from them. These correspondent relationships enable us to grow the portfolio and, in many instances, acquire new customer relationships.
Our home equity lines of credit (HELOC) continue to be a popular choice for our borrowers. We originated 63 HELOCs for a total of $10.6 million in 2017. These are in addition to the portfolio originations of $59.5 million. For many of our borrowers, the HELOC has become the solution that allows them the opportunity to purchase a second home or a new primary residence by borrowing against the equity in their current primary residence. For those borrowers that are purchasing a new primary residence, the interest only feature of the HELOC gives them the flexibility to wait and sell their current home when the time is right for them. For others, the HELOC may be used to renovate their existing home, send a child to college, buy a new car, etc.
A lack of inventory for single family homes and condominiums within our local seacoast market has slowed down real estate sales and, due to supply and demand, has pushed the median sale price of a single family home to an all-time high of $515,000.00. It has become almost impossible for a first time home buyer with moderate income to find an affordable home in this area. For example, if a borrower were to take a mortgage of $412,000.00 (which is 80% of the value of median sale price) at our current 10/1 ARM rate of 3.875% for 30 years, their principal and interest payments would be $1,937.37, not including taxes and insurance, which realistically could amount to at least $600.00 per month. This means their housing debt is
“As technology and customer preferences change, we must be ready to react, adapt and provide an exceptional customer service experience.”
over $2,500.00 per month. In order to fall within the secondary market debt to income ratio guidelines of no more than 33% of your income representing housing, this borrower would need to have an annual income of at least $90,000.00. As a point of reference, the median household income in this market area is $77,000.00. Because of this, we are seeing more and more borrowers looking at homes in surrounding towns outside the seacoast area.
The NH economy is showing strong signs of improvement and boasts one of the lowest unemployment rates in the nation at 2.6%. This contributes to an improvement in the Bank’s mortgage delinquencies, thirty days or more past due, from .72% in 2016 to .35%. Nationally, the mortgage delinquency rate also continues to improve from 4.25% in 2016 to 3.54% at the end of 2017.
According to the Federal Reserve Vice Chairman for Supervision, Randal Quarles, the U.S. economy is “in the best shape that it has been since the mortgage crisis” and he signaled that the Fed will continue to gradually increase rates in the months ahead. Our goal is to always make sure that our rates are in line with our competitors and attractive to our borrowers.
Joan W. Gile, Executive Vice President/Operations Officer
A strategic question we asked ourselves in 2016 was how to remain relevant and attractive to new customers. To help us answer this question, we asked Andy Smith, Ph.D. of the University of New Hampshire Survey Center to conduct a focus group with local 18-35 year olds. The group included both customers and non-customers. They were asked to provide us feedback on the types of financial products they seek. We focused some of our efforts in 2017 on responding to the feedback.
When we make things easier to use and access, there is a better chance that customers are going to utilize the Bank and continue to grow their relationships. We’ve introduced several enhancements and products to help provide our customers with a better, more convenient banking experience.
The topic of ATM fees was one item discussed by the focus group. The general consensus of the group concluded that low cost and easy access to their money was important. At Piscataqua Savings, we currently waive our $1.00 foreign ATM fee but many times the ATM owner adds a “surcharge” fee to the withdrawal amount. These fees can range anywhere from $2.00 to as much as $6.00. The enhancement made in April of 2017 offered an additional benefit of automatically refunding up to $10.00 per calendar month of surcharge fees for eAccess accountholders. The accountholder doesn’t have to do anything special to request this as we made it effortless for them to be able to access their own money without paying anything extra anywhere they travel.
Ordering a new debit card can take up to two weeks, causing inconvenience for customers who are not able to access their funds right away. To solve this issue, we implemented Instant Issue Debit Cards. This allows customers to leave the Bank with a temporary debit card when opening a new account. This encourages
them to begin using their account right away. We can also issue a card for any customer needing a replacement for a lost, stolen or compromised card to limit interruption and prevent them from needing to use another bank’s debit card or credit card.
In February we completed a major overhaul of our online banking system. The new look and feel is user-friendly and the new features add to the overall customer experience. Customers are now able to access 18 months of their transaction history along with enhanced search and sort capabilities. Transactions can now be categorized to assist with budgeting and expense tracking. This makes it easier for a customer to get an overall picture of their financial situation. The bill payment feature is fully integrated now, giving a more seamless transition between account information and the bill payment system.
Monthly usage of the eMobile App has increased by 73% over the year with a 36% increase in eDeposits. This makes mobile banking the fastest growing delivery channel we offer. We expect soon it will be used more than online banking. You can manage your accounts, transfer funds, pay bills, pay people (Popmoney®) and make deposits, anywhere and anytime from your phone. More enhancements are in development as this technology is advancing rapidly. The most significant enhancement was the integration of CardValet® into the eMobile App. Users can control their debit cards from the eMobile App without having to open an additional App using a different password. You can set transaction limits, block certain types of merchants and block transactions outside of certain areas. This feature will help prevent unauthorized use of debit cards by allowing customers to limit access to their cards when traveling or anytime they choose.
There were several back- office upgrades to improve operational efficiencies. The Accounts Payable, Investment Accounting, and Fixed Asset Account systems were all enhanced during the year. The Accounts Payable enhancement enables invoices to be paid faster. The Investment and Fixed Asset systems have been updated and have automated the posting of transactions to the general ledger. Eliminating manual posting saves significant time and reduces potential errors.
We implemented an online Account Maintenance review system to improve efficiencies in monitoring and approving changes to accounts, such as names, addresses and interest rates. Because it is an online system, reams of daily paper reports are no longer necessary.
As technology and customer preferences change, we must be ready to react, adapt and provide an exceptional customer service experience. Portsmouth has numerous financial institutions and we must remain attentive to these changes to remain competitive, obtain our portion of market share and deepen relationships with our existing customers.
Information Technology Report
Antone Cabral, Vice President/IT Officer
Information Technology (IT) is an ever changing landscape. The IT Department aims to deliver a great experience for both the employees and customers of Piscataqua Savings Bank. We are constantly looking for new and innovative ways to conduct Bank business by providing both technology and support to all of our users for today, and tomorrow.
IT changes from minute to minute, each day new threats are identified (and there are even more threats that are not identified). On top of keeping all the teller machines up and running, making sure employees have the tools they need to serve our customers, and most importantly protecting our customer’s information, cybersecurity is the number one priority of the Piscataqua Savings Bank IT Department. The Bank is committed to staying at or above industry standards in all aspects of cybersecurity.
We are now seeing the industry react in a similar fashion. For example, the Federal Deposit Insurance Corporation (FDIC) has changed their process for IT examinations. Previously, Information Technology was a smaller component of an overall Bank examination – now the scope has been expanded to its own separate report.
Every financial institution has an overall governing body to make sure all laws and regulations are being followed. Piscataqua Savings Bank is governed by both the State of New Hampshire Banking Department and the FDIC. These examinations are conducted every 12 to 18 months. Between examinations, the Bank will have external companies audit every policy, procedure and configuration to make sure the systems are protected and up to date with all industry standards. In November of 2017, the Bank participated in a full IT system audit that focused on general IT controls. In March of 2018, a system penetration test was conducted. The scope of this audit tested not only the perimeter security defenses, but all internal security measures, defenses and reporting functions. In today’s cybersecurity landscape, these tests are not only mandatory, they are very informative. The tests are conducted by Certified Ethical Hackers (also known as White Hats) and they bring in real world – up to the minute hacking techniques and also serve as continuing education for the IT Department to make all the computer systems as secure as possible.
In 1986, the Bank purchased its first personal computer; a used computer with two floppy drives that ran a simple General Ledger program. In 2018, the Bank’s network has expanded to over 150 devices that serve in a number of different capacities. Josh Johnson was brought on board in 2015 as an IT Assistant to help manage the device side of the network and provide help desk support to all employees. Josh has learned a lot in a very short time and through a lot of hard work, was promoted to Network Administrator in 2018. This step up, allows the IT Officer more time to oversee the IT functions of the Bank and focus on strategic processes, along with, concentrating on the Bank’s renovation project.
With the upcoming renovations, the Bank is taking this opportunity to upgrade our entire Bank infrastructure. The new Computer Room has been designed to incorporate the latest technology and security, while incorporating room for future expansion. The new infrastructure (cabling, switches and firewalls) will allow the Bank to take advantage of faster connectivity, improved security and an overall better user experience. When building such an infrastructure, new and creative efficiencies are created, both on the back-end communication side, but also customer-facing. Some of the fun upgrades our customers will experience will be new display technology in the lobby and guest Wi-Fi for the use of any of our mobile technology services.
The renovation infrastructure upgrade is the first step in a two step process. Once the renovation is complete (estimated in December 2018) and all the base IT structure is in place, the Bank will embark on Virtualization technology that will focus on a new platform to prepare for the all the future IT initiatives. Stay tuned…
Trust and Investment Department Report
Thomas Queeney, Vice President/Senior Trust Officer
The market value of the Trust & Investment Department on December 31, 2017, was $304,617,521. This represents a year over year increase of $35,739,880 or 13.29%. 2017 year-end net income after taxes totaled $243,684, up 51.57% from 2016 of $160,769.
Having finished off the year with solid financials and assets under management, we wished Kathy Donovan a fond farewell upon her retirement. Her guidance, oversight, and trusteeship of the department were much to be admired and appreciated.
During the year, we welcomed Michael Rodier, CFP® as our new Vice President/Senior Portfolio Manager. Mike has over thirty years of experience having worked at Wellington Management Company in Boston and then running his own investment advisory and financial planning firm.
Building and maintaining relationships with account owners, fiduciaries and beneficiaries is essential to the administrative services provided by the Piscataqua Savings Bank Trust & Investment Department. We are committed to helping our clients achieve their long-term financial goals by providing quality trust service in an objective and personalized manner. We look to assist families and individuals as they grow, preserve, and pass on their estates with consideration on taxation, risk, and personal preference. We are focused on a disciplined investment approach with integrity.
With priority on our existing client base, we also look for ways to reach out to our market area and inform them of our services. Programs for our professional centers of influence along with consumer estate planning awareness shall continue to be developed.
During the past year, the trust accounting system contract was renewed and secured for an additional five years. Having sharpened our pencil, we were able to reduce and fix some of our expenses, and improve efficiency. This extended contract term affords us more time to focus on our top priority – the client. As additional department vendors and collaborations are being reviewed, quality operational processes and cost shall be key considerations.
The Piscataqua Savings Bank brand is steeped in tradition of serving the people and needs of the community. As former department head Richard Kaiser stated in 2012: “We are very fortunate in that New Hampshire has become one of the most progressive states with respect to its trust laws and is one of the best states to conduct trust business.” This quote rings as true today as it did six years ago. The continued success of the Trust & Investment Department depends on our commitment to a standard of excellence in all we do. To succeed, we shall make the client our highest priority.
Mike Rodier, CFP ® /Vice President/Senior Portfolio Manager
World stock markets finished 2017 on a high note, with strong fourth quarter performance propelling gains over 20% for the year. Global stock markets continued their synchronized rise, driven by the US tax bill and improved economic outlooks here and abroad. Investors were undeterred by political infighting in the US, continued saber-rattling from North Korea, and the looming Brexit separation.
The US dollar fell 7.5% against a basket of world currencies, the first decline in five years, and the largest in a decade. US and international bonds crept higher despite the ebullience in the equity markets. The 10-year US Treasury yield closed at 2.41%, down from 2.45% at the beginning of the year.
The US tax bill is projected to add 0.3 to 0.7% to GDP growth in 2018 according to Wall Street economists. Corporate earnings will be boosted by 5-8%, analysts predict. Corporations with a domestic focus (often small and mid-capitalization) tend to pay higher tax rates, and thus will benefit the most. Provisions in the tax bill will put pressure on real estate prices. The doubling of the standard deduction will make the mortgage interest deduction less valuable and the limit on state and local tax deductibility makes property taxes more onerous.
Oil prices rose over 12% during the year, spurred by continued output cuts by oil producing countries and higher expected world economic growth. The prospect of a global economic growth spurt sent copper prices, an economic bellwether, up over 30%.
With unemployment at historical lows, record high stock prices and low interest rates, consumers rang out the year with a blockbuster Christmas shopping spree, as both online and bricks and mortar retailers prospered. Consumer confidence reached its highest level in seventeen years (just before the tech bust). But despite growing income and higher net worth, consumers are saving less – under 3% going into the holiday shopping season. Only two years ago the savings rate was 6.3%. The last two times the savings rate was this low was in the late ’90s and mid ’00s, with both periods being followed by economic recessions and falling asset prices.
US stock returns were not only notable for their magnitude but also for their steadiness. Stocks had positive total returns in all twelve months for the first time in nearly fifty years. Daily volatility was also very low – the lowest since 1964. Stocks did not fall as much as 3% on any day of 2017. The extreme stability of returns can be attributable to the relatively slow but steady economy, a predictable Federal Reserve, and improving corporate earnings.
Stock investors were taken for a roller coaster ride in the first quarter of 2018, as volatility returned to the markets after a quiet 2017. Stocks surged to new highs in January, plunged then rallied in February, and ultimately ended the quarter with a modest 1% decline. US and global economic prospects for 2018 remain positive, with world GDP predicted by the World Bank to edge higher in 2018, to 3.1% from 3.0% in 2017. The US is projected to grow at 2.5%, up from 2.3% in 2017. However, stimulus from the US tax bill will likely give the US a boost in 2018 that will subside in 2019, when growth will slow.