Last year at the Annual Meeting you heard firsthand about the rich history of the Bank that has been rooted in the vision of the Bank’s founding fathers; a mutual savings bank to serve the financial needs of the Seacoast community. It was a unique time when local citizens got together to form a bank to serve the needs of the community and not for financial gain. One hundred forty-two years later and our values are still the same.
The banking industry has changed considerably since 1877, but Piscataqua Savings Bank still remains relevant to its customers and the community. The Board of Trustees recognizes the importance of the Bank’s corporate structure and formed a Governance Subcommittee in 2018 to research ways to preserve and enhance mutuality. This research included review of existing banking regulations as well as changes that can be made to the Bank’s corporate documents. The Bank hired attorney Robert Dietel of Gallagher, Callahan and Gartrell to assist us with the research.
The goal of the Subcommittee was to make a recommendation, to the Board of Trustees and ultimately to Corporators, of changes that could be made to strengthen the corporate documents to preserve mutuality. Care was taken to make sure the corporate documents were not drafted to be overly restrictive so that if there became a time that change was needed it could still be accomplished.
Currently the Articles of Agreement require a majority vote (51%) for any action taken by the Corporators. In order to better preserve mutuality, the Board of Trustees is recommending that the Articles of Agreement be amended to include a new article that requires a supermajority vote (66.66%) only for a conversion to stock with all other actions remaining a majority vote. In addition to a supermajority vote, additional language is being recommended to prevent another entity, not acting on behalf of the Trustees or Corporators, from forcing the termination of the Bank’s mutual status.
These changes convey to the pubic the Bank’s strong commitment to independence and mutuality.
Benefit (B) Corporation
While mutuality has been the core component in shaping the culture of Piscataqua Savings Bank, it is often difficult to explain to people how mutuality works and why the Bank is different from other financial institutions. Being owned by our customers allows us to focus our attention more on customers and community, instead of shareholder value and profit. This focus is the driving factor in the Bank’s culture and the basis for the Bank’s reputation for outstanding customer service and doing right by our customers, community and employees. So, how do we explain our differences from other financial institutions? The Board of Trustees think the answer is in becoming a Benefit (B) Corporation.
B Corporations are businesses that are legally required to consider the impact of their decisions on their customers, community, workers and environment, much like a mutual savings bank. B Corporations are certified by a third party, B-Lab, to very rigorous standards to assure that a company is a business doing good for the community. We can join with 2,700 other businesses from around the world that are certified B Corporations to demonstrate to the community that Piscataqua Savings Bank meets the high standards of a B Corporation.
Becoming a B Corporation would not change the Bank’s C Corporation or state chartered mutual savings bank charter status, but would provide a certification that complements the Bank’s mission of serving the Seacoast community. In addition to Corporator approval, becoming a B Corporation would require approval from the New Hampshire Banking Department and the Federal Deposit Insurance Corporation (FDIC).
This certification provides a distinction from other financial institutions in a very homogenous industry. Being a B Corporation would aid in attracting customers aligned with our business model and culture. The certification would also benefit the Bank in attracting quality employees that want to work for a company that shares their values of customers and community first, before profits and shareholder value.
After extensive discussion and consideration, the Board of Trustees is recommending that the Bank become a certified B Corporation.
You will note that the agenda of the Annual Meeting has been changed to allow for an in-depth presentation of the above recommended changes and time for a question and answer session prior to the business session and vote.
Richard M. Wallis, President/CEO
David H. Bryan, Vice President/Treasurer
National economic conditions surged to begin 2018 as enthusiasm for the 2017 Tax Cuts and Jobs Act bolstered consumer confidence and spurred business investment. Trade disputes with China, Mexico, and Canada and the failure of the current administration to secure funding for the border wall with Mexico tempered economic growth and introduced more volatility in the markets. Fears of a global economic slowdown contributed to sharp declines in stock prices during the fourth quarter. The ten-year Treasury Note peaked at 3.24% in early-November but ended the year at 2.69%. A change in leadership at the Federal Reserve resulted in Jerome Powell succeeding Janet Yellen as Federal Reserve Chair. Mr. Powell provided a pro-growth policy mindset and continued accommodation through four gradual interest rate hikes. 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 and third quarters of 2018. The short end of the Treasury curve between the six-month Bill and the five-year Note inverted in December and the two-ten Note spread was only 21 basis points to close 2018. The Federal Open Market Committee has signaled a pause in interest rate hikes moving forward which has settled the markets and eased fears of a coming recession in 2019/2020.
Deposit growth can be characterized as weak in 2018 with $5.8 million added in total funding. Money market accounts grew $5.4 million during the year while certificates grew close to $4 million with the introduction of a 13 month ‘special’. Business checking accounts shrank $1.2 million and savings accounts lost $2.2 million. The bank’s correspondent lending channels helped spur growth in loans for the second consecutive year with $22 million in growth for 2018. In order to fund the construction project and loan growth in the midst of modest net deposit inflow, the Bank continued to allow the investment portfolio to runoff to the tune of $13 million. The remaining shortfall in funding was covered with borrowings from the Federal Home Loan Bank. At year-end the Bank carried a six- month borrowing for $5 million at 2.50% that matures within the first quarter of 2019. Loan growth is expected to slow in 2019, which may provide opportunities for the Bank to bolster its investment ladder. Opportunities to invest in the near-term will be focused on short-term instruments and mortgage-backed securities.
The continued shift in earning asset composition towards loans helped off-set increased interest expenses from repeated rate hikes. Operating expenses were largely constant from 2017 to 2018. An accounting adjustment to recognize correspondent loan fee expense and spread it across a five-year life of loan resulted in an additional $206 thousand in loan income in 2018 from over-expensed broker-purchased loans made in 2017. Net Interest Income increased about $615 thousand over 2017 levels, and total expenses decreased in 2018 by $112 thousand due to the reclassification of secondary loan expenses mentioned above and a reduction in pension expense of about $84 thousand. Net Income significantly improved in 2018 due largely to the accounting adjustment and a lower tax rate. Net income for 2018 totaled $1.48 million, an increase of $960 thousand from the previous year, as an adjustment associated with the Tax Cut & Jobs Act at the end of 2017 factors into the comparison. Management is hopeful that the culmination of the renovation project will provide opportunities to bolster earning assets and build upon 2018’s strong financial results. 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
It was another year of positive loan growth for the loan department in 2018. With total portfolio originations of $51 million and continued lower turnover than in prior years, our loan portfolio grew by $22 million. Since the beginning of 2017, the portfolio has grown by $44 million. The correspondent loan program continues to be a large contributor to this growth with half of the total originations for the year coming from our correspondent lenders. The relationships with the correspondent lenders enable us to reach a customer base that may not necessarily have sought us out. In addition to our portfolio originations, we also originated 61 home equity lines of credit (HELOC) for a total of $11.6 million.
On a daily basis, we are faced with fierce competition from a wide variety of banks, credit unions, mortgage companies and online mortgage lenders. According to a recent article in the NH Business Review, “as the NH economy recovered, banks began spilling across the borders. Since 2011, fifteen community banks from Massachusetts, Maine and New York have entered the New Hampshire market. Like apartment dwellers on a hot August day, most have flocked to the Seacoast, the most heavily banked region of the state.” Of these fifteen banks, nine have located in Portsmouth: Eastern Bank, Newburyport Five Cents Savings Bank, The Provident Bank and Cambridge Trust Co., all from Massachusetts; Bangor Savings Bank, Kennebunk Savings Bank, Camden National Bank and SIS Bank, all from Maine; and NBT Bank from New York. In total, Portsmouth, a city with an estimated population of 21,485, is home to 19 banks, one for every 1,130 residents. The competition doesn’t stop with just these banks as there are numerous mortgage companies as well. Everyone wants a piece of the proverbial pie! Despite this competition, we ranked 3rd overall for the number of loans originated in Portsmouth in 2018.
It’s really no surprise that the above mentioned banks migrated to Portsmouth as the real estate market continues to be strong. The median home value in Portsmouth is $442,600. Portsmouth home values have gone up 4.7% over the past year and Zillow predicts they will rise 3.7% within the next year. The median list price per square foot in Portsmouth is $368, which is higher than the Boston-Cambridge-Newton Metro average of $287. The median price of homes currently listed in Portsmouth is $599,450 while the median price of homes that sold is $472,800. The problem continues to be a lack of inventory which obviously slows down sales. Because of this, we are seeing more and more borrowers looking at homes in surrounding towns outside the seacoast area.
Despite the Feds raising rates four times in 2018, our mortgage rates remained relatively low. At the start of 2018 our conventional 30 year fixed rate was 4.00% and ended 2018 at 4.625%. Home equity line of credit rates went from 4.50% at the start of 2018 to 5.50% at the end. We closely monitor mortgage rates in comparison to our competitors to ensure that our borrowers are receiving the best rate possible.
The NH economy is strong and boasts one of the lowest unemployment rates in the nation at 2.6%. In addition, NH’s rate of foreclosures continues to decline from the peak in 2010 during the Great Recession. The Bank’s mortgage delinquencies, thirty days or more past due was 1.37% at the end of 2018, which, in comparison to 2017’s .35%, would appear to be alarming. The jump at the end of 2018 was due to several loans with large balances that were past due but subsequently brought current by the next month. Nationally, the mortgage delinquency rate improved to 2.83% in comparison to 3.54% at the end of 2017.
Joan W. Gile, Executive Vice President/Operations Officer
The renovations during 2018 brought many operational challenges. We had the good fortune to have space in the building behind us, affectionately called 200 East, where we moved the Trust Operations, Compliance, Audit, and Loan Departments during different phases of the project. The moves were well-orchestrated and there was minimal impact to customers. Although it is a beautiful space, we will be glad to be back under one roof again.
In December we opened up the new walkup area and teller dialogue station. We updated our look, keeping the old and new in mind. It is a classic look and not trendy. The new walkup window opens to allow tellers to converse without having to talk through a pane of glass. The dialogue station is designed to provide a more casual banking experience and allows the tellers to move around more freely. With the completion of the main lobby, we will have a teller line for customers who prefer a more traditional banking environment.
The openness of the Teller areas is possible due to the installation of Teller Cash Recyclers (TCRs). A TCR is a small vault and automates the cash portion of transactions. It takes in and dispenses currency eliminating the need for the teller to manually count the cash. It keeps detailed records of the cash and even detects counterfeit bills.
Debit Card Rewards Program
A few years ago we surveyed a focus group to help us determine the products and services those customers and potential customers were looking for. A rewards program was a common response. Last year we introduced the uChoose Rewards® debit card rewards program. When you use your Piscataqua Savings Bank Visa® Debit Card you can earn 1 point per $2 for all your purchases wherever you shop. The points can be redeemed for merchandise, travel experiences, event tickets, gift cards and cash.
In addition to a rewards program, the focus group talked about ATM fees. During the renovation project when our ATM was out of service we waived all fees and refunded all the fees other banks charged. Now that our machine is back in service, we have decided to make some exciting changes. Effective 4/1/19, we eliminated our $1.00 ATM fee. This means when you use your ATM or debit card at another location, there will be no charge from Piscataqua Savings Bank. Additionally, all customers will be refunded up to $10.00 per month in surcharges (ATM fees charged by other banks). eAccess account holders will have all surcharges refunded.
We are excited to complete our renovation and enjoy the updated lobby. You will be able to choose the experience you prefer to conduct your banking. We continue to explore technological advances in banking to help you attain your financial goals. However, we will always be here for personal conversations and are eager to answer your questions. Our lobby may have changed, but the faces you see when you come in are the same.
Information Technology Report
Antone Cabral, Vice President/IT Officer
Did someone say renovation? As you walk through the beautiful new building with an improved floor plan and stunning architectural designs, you would have to look “under the hood” to see all the new components this new building has to offer. From the very beginning of this project we asked ourselves, “What will banking look like in 50 years?”. Although we have not been able to locate that proverbial crystal ball, there is no question technology will play a big part in that future.
We took full advantage while all the walls were disassembled to create improved access through the four interconnected 200+ year old buildings, not only to meet today’s technology needs but to accommodate any future technological developments. All of the new chase ways unite in the newly constructed Server Room built to exceed today’s standards including power backups, cooling and security. In order to keep business as usual and provide the maximum uptime possible, the Server Room upgrade was split into two phases. Phase 1 included all new security firewalls and network switches, while all of the back-end equipment was moved “as is”. Phase 2 will consist of an infrastructure overhaul by utilizing virtualization, but more to come on that next year.
As this has become one of the foremost issues in the technology area, we leveraged this opportunity to enhance our cyber footprint. With the addition of the new firewalls, routers and switches – we introduced additional layers to our security called segments. This simply creates additional perimeters to an already complex network infrastructure. With each one of these segments, additional alerts and reports are available thus keeping our information as secure as possible. In order to verify these claims, annually the Bank undergoes testing from a CEH (Certified Ethical Hacker) who attempts to break into the network both externally and internally using known exploits and a number of other tricks. Although cybersecurity is a daily battle (perhaps even an hourly battle), I am happy to report our defenses withstood this year’s tests. With the addition of our network’s 24/7 monitoring, we are everyday researching new ways and ideas to keep Piscataqua Savings Bank secure.
Capitalizing on the benefits of network segmentation, Piscataqua Savings Bank will introduce a new public Wi-Fi network our customers can take advantage of. With the overwhelming popularity of the Online and Mobile Banking app, customers can come in and log on for all of their mobile banking necessities. A sitting area and a charging station area are available to all customers for tutorials or troubleshooting requests.
This past year, the IT Assistant Josh Johnson had been promoted to Network Administrator. Josh’s new duties include oversight of overall network operation and security.
Trust and Investment Department Report
Thomas Queeney, Vice President/Senior Trust Officer
The Trust & Investment Department ended the year with assets under management of $285,565,051, down 6.25% for the year. Organic asset growth for the year was $34.6 million (1.86 times over our budgeted goal) albeit erased by outflows of $40 million. We experienced the “circle of life” with seventeen client deaths this year. Though we were able to retain some of the next generation business, some distributions and bequests were charitably inclined while other funds going to family with out of state established relationships or immediate need for the funds. With client privacy utmost, it can be a quandary to gain the favor of remainder beneficiaries.
Trust net income for 2018 was $355,714. Improvement year-over-year was primarily attributable to a decreased income tax rate, maintaining expenses, and improving top line income. The department’s annual efficiency ratio (cost to earn a dollar of income) improved to 76.55% in year 2018 from 80.70% in year 2017. Assets under management, increasing over the years, have had a compounding momentum to fee income earned.
Early in 2018, we welcomed Laurie Siergiewicz as our new trust officer who offers complementary skills and needed support. Laurie brings strong investment and retirement knowledge along with a proven sales background. Later in the year, we hired Jenna Ranauro, Trust Operations Assistant. These new members bring great skill sets that are transferrable to our team.
During the year: we cheered Brianna Adams on her successful graduation from Leadership Seacoast, concluded an issue-free examination by the New Hampshire Banking Department, hired a new fiduciary tax preparation company, and seamlessly moved to our newly renovated office space.
Much of 2018 was a transition for the Trust & Investment Department with focus on our existing clients, staffing, operational procedures, risks, and controls. As we commence 2019, we become strategically poised to strengthen client and internal staff communication while seeking new opportunities with potential prospects and professional centers of influence.
We remain steadfast that our clients are paramount. 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. As the eyes and ears of the community, please let us know whenever we may be of assistance.
Mike Rodier, CFP ® /Vice President/Senior Portfolio Manager
US stocks fell over 4% in 2018, the first negative annual return in nine years. All of the damage was done in the fourth quarter, when a host of economic concerns sent stocks down 13.5%. International stock markets fared even worse, with nearly every country tumbling. The overarching theme was the fear of slowing economic growth across the globe in 2019. Chief among the potential catalysts would be the expansion of tariffs and a full blown trade war between the two largest world economies, the US and China, escalating a burgeoning geo-political battle. In Europe, a “hard” Brexit split is still a distinct possibility and would send the UK economy into recession, dragging the continent with it. Two pro-business, pro-European Union heads of state, German Chancellor Angela Merkel and French President Emmanuel Macron, suffered political reversals and no longer can provide the same stability and support for a united Europe.
The Federal Reserve faced more scrutiny than normal when stocks fell sharply as it hiked interest rates a quarter point in December despite complaints from the White House. While current economic conditions justify recent rate hikes, further raises in 2019 depend on whether the economy weakens and inflation remains dormant. The Fed’s unprecedented wind down of its $4.1 trillion balance sheet entered its second year in October, effectively pulling $600 billion annually from the marketplace. It is not clear if there will be unexpected or unintended effects on the capital markets. The ten-year US Treasury yield rose to 2.68% from 2.41% a year ago, though the yield reached 3.23% in the third quarter. The broad bond market was flat in 2018, with income offsetting modest price erosion. Short-term bonds outperformed long-term bonds and government bonds outperformed corporate bonds.
In the US, technology stocks were hit hard during the fourth quarter selloff, but still ended the year as one of the better performing industry sectors, falling only -1.6%. Only utilities (+.5%) and health care (+4.7%) finished in positive territory. The energy sector, hit by a sharp drop in oil prices, was the worst performing sector falling -20.5%. Financials and industrials both lost -15%. Growth stocks outperformed value stocks and large capitalization stocks outperformed small and mid-cap stocks.
In December the Fed lowered its estimate for 2019 US GDP growth to 2.3% from its September estimate of 2.5%, a deceleration from the 3% growth projected in 2018. The Organisation for Economic Co-operation and Development (OECD) predicts world GDP growth will slow to 3.5% in 2019 from 3.7% in 2018.