When I graduated from college in 1977, my employer at that time sent me a graduation card with a quote from Booker T. Washington. It read: “Success can be measured not so much by the station we reach in life, as by the obstacles we overcome in our quest to succeed.”
I have often recalled and took that message to heart.
Perhaps at no other time has it been more relevant than when we look at the year 2020.
President, Martin T. Neat
Let me first say, that any amount of inconvenience or disappointment that we may have felt at times during 2020 is minor compared to the pain and suffering of more than 24 million of our fellow Americans who suffered from COVID 19, of the more than 400,000 families in this country who lost loved ones to this terrible disease and indeed to the families of nearly 500 neighbors, friends, customers and extended family members on the Lower Shore of Delmarva who perished from COVID 19 during the past year.
We are indeed fortunate. COVID 19 and its impact on the economy will simply be remembered as an obstacle in 2020. There were of course other direct and indirect challenges, but we pray that this worldwide pandemic will soon be one for the history books.
And so, we face some obstacles.
The historically low interest rate environment created to address the economic disruption of COVID 19 is particularly challenging to a portfolio lending institution such as First Shore Federal. It produces both ultra-low loan rates and negatively affects our savings customers by pushing savings rates very low. We were impacted by both during 2020 as I will describe later.
And the accompanying economic stress to many of our customers was very real.
We had more than 100 loan customers who requested – and we provided – payment deferrals of up to six months during the year. Those deferrals reduced our income by more than $500,000 for 2020.
It also produced operational challenges.
Our branch lobbies were closed for extended periods of time – making our typical friendly and professional interaction with customers more difficult.
And more than 20% of our staff worked from remote stations or different offices to ensure appropriate social distancing as the year passed.
Even so, more than 30% of our staff missed significant time due to the need to isolate after potential exposure to the COVID 19 virus. Thankfully, as of this date only one staff member has tested positive and they recovered and returned to work.
Yet, while some obstacles, including the need to eradicate COVID 19 still remain, and interest rates continue to be at historically and artificially low levels, we are confident that First Shore Federal will continue to progress and prosper in the years ahead.
So, I am pleased to report that during 2020, First Shore Federal remained highly capitalized, realized modest growth, and earned a fair profit, continued to provide outstanding customer and community service, and improved its ability to provide that service by expanding its use of technology.
Overall, the association’s assets grew by 2.7% and our capital increased by 2.78% as of year-end. In fact, based on one key measure, our net worth or capital ratio of more than 15.3%, First Shore Federal is now the most highly capitalized (i.e. the strongest) financial institution headquartered on the Eastern Shore.
And First Shore Federal again earned a 5-star rating, the highest rating awarded for financial stability from Bauer Financial, a leading independent financial rating and research firm.
With more than $50 million in capital, First Shore Federal is well positioned to continue the positive trends of many years (as displayed on the capital ratios graph) and to prosper in the years ahead. .
Total expenses for 2020 declined by 2.9% overall as the association “tightened its belt” while at the same time, continuing to invest in the future. In fact, technology expense, rather investments, grew by 18.8% as we took aggressive action to grow our capacity for the future as well as respond to the COVID-related needs of 2020.
Among the improvements made were installation of fiber lines for all branch locations, purchase of new workstations and routers at those branches, purchase and/or updates for all ATMs, as well as laptops and VPN licenses for remote work capabilities. In addition, our I.T. Team upgraded to Office 365 and negotiated our core processing contract with significant enhancements over the next five years.
As I stated earlier, the ultra-low interest rate environment was a major challenge, particularly after the reductions due to the COVID crisis.
Even as we experienced 425 loan payoffs totaling $35 million largely due to that environment, the association added new loans of more than $50 million. Overall, new originations were up significantly from past years.
Among the 388 new loans were 176 mortgages for nearly $26 million, 137 manufactured home loans for more than $8 million, and 42 commercial loans for more than $12.8 million.
Overall, this solid growth in key categories such as commercial loans, manufactured home loans and share loans has positioned the association to offset some of the interest rate risk in today’s environment.
On the deposit side, the association achieved impressive growth of $11.5 million in money market accounts, $9.6 million in checking accounts and nearly $4.7 million in savings accounts. And the excellent growth in share loans, i.e. loans secured by certificates of deposit (CDs) of 34% is a particularly attractive way for customers to borrow money in today’s interest rate environment while once again offsetting interest rate risk for First Shore Federal.
The ultra-low interest rate environment of 2020 meant that the pricing that we could extend in two of our traditional niches – home mortgages and certificates of deposits was difficult. And as a result, our balances in both of those categories fell. Mortgage balances declined by more than $9 million and CDs by more than $19 million.
Considering the substantial interest rate risk which long term, low fixed rate mortgages present to a portfolio lender such as First Shore Federal, the shift from both categories is positive although it is not how we would like to have made this evolution.
Ultra-low rates are a “win-lose” proposition. On one hand borrowers benefit from the extremely low loan rates. On the other hand, those customers who have traditionally depended upon FDIC insured CDs for monthly income are significantly burdened.
Indeed, as is clear from the growth in other deposit categories for First Shore Federal, many of these customers shifted their deposits into other types of savings with First Shore Federal. But most have remained with CDs.
But we do look forward to the return of a more balanced interest rate environment which serves the needs of both borrowers and savers.
Community service remains a key part of our mission. We used an advertising slogan of “Community Minded – Just Like You”. And I am proud to report that the association continues to be recognized as a leading community citizen.
First Shore Federal was again awarded a rating of outstanding for community reinvestment by our federal regulator – a rating which the association has earned for more than 25 years consecutively. Our directors, officers and staff continued to support numerous community groups and projects during 2020 – in many cases, in leadership roles.
Among those roles were the chairman of the board of Habitat of Wicomico County, chair of SNHS, vice chair of the Community Foundation of the Eastern Shore, board member of the Maryland State Board of Education, vice chair of the Village of Hope, chair of the Wor Wic Community College capital campaign, co-chair of the 75th anniversary celebration of the United Way, and chair of the Wicomico County Board of Education.
Looking ahead, we will seek to make 2021 a year of recovery from the impact of COVID 19 and continued progress for First Shore Federal and the communities we serve. We have money to lend and with our very strong capital level, we have the capital to support such growth.
Growth helps to fund new products and services to our members. It enables us to continue to pay competitive interest rates and to afford other operating expense to fulfill this mission. And it allows us to support the communities that are so good to First Shore Federal in return.
That growth will continue to be tempered, however, by national economic policies. The low interest rate environment of the past decade, and the current ultra-low interest rate environment as well as our own prudent management requires that the association continue to manage its growth in fixed rate loans and investments.
We can grow only if we make fairly priced loans that do not also carry disproportionate levels of interest rate risk. Long term fixed rates at the artificially low rates that we have seen in recent years, and that were particularly in evidence during 2020, are a prescription for future difficulty.
And, as a mutual institution and locally focused institution, First Shore Federal always looks to the future of our community.
This strategy has served the association well as First Shore Federal’s historically strong capital position has continued to grow impressively.
As we enter our 68th year of service to the Lower Shore, we do so with continued enthusiasm and confidence in the association’s long-term future.
We will continue to expand our services and make improvements to the association’s branches, products, and services.
We will continue to evolve and to invest in technology and services that will meet our customers’ needs while being safe and profitable for the association.
We enter 2021 with the strongest capital position in our history, a substantial reserve for any loan problems that do arise, an excellent reputation in the communities we serve, a dedicated and experienced staff and an ongoing commitment to customer service and making First Shore Federal the best it can be.
We thank our managers and employees for their dedication and ever-present teamwork, our outstanding board of directors for its wisdom, oversight and direction, and our valued customers, our members, for their confidence in and business with First Shore Federal.