ANNUAL REPORT 2013 - Piscataqua Savings Bank

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President’s Message

Just as it is stated in our Value Statement shown on this report cover, Piscataqua Savings Bank is very different than other financial institutions. What makes Piscataqua so different in such a homogenized industry? Is it due to being a mutual savings bank, its retail focus, or its people devoted to serving its customers? Well, it is all of those things, but mostly it’s the people. It’s the Corporators who advocate for the Bank, the Trustees who set the course, and the devoted Staff who provide the great customer service; it is all of us working together to make Piscataqua Savings Bank a cornerstone of the Seacoast community.

Long tenured employees are one of the Bank’s greatest assets. It takes time for customers to entrust their financial affairs to another individual. Many of the Bank’s customer-staff relationships have been built over decades and have spanned family generations. Currently, more than half of the Bank’s thirty-nine employees have worked at the Bank for ten years or more. Customers benefit from this long tenure by being provided institutional knowledge, product knowledge, and innovative financial solutions.

In 2013, the Board and management recognized the need to develop a succession plan to preserve the advantages of long tenured employees. The plan identified those positions within the organization called “key” positions and set forth a plan to assure that those positions can be maintained throughout the organization.

Key positions encompass responsibilities for performing mission-critical work necessary to help the Bank achieve its business goals. When the Bank lacks a key position incumbent, it is apparent because important decisions cannot be reached and critical activities are delayed preventing the organization from achieving its business goals. Key positions have responsibilities for operational oversight, strategic planning, policy management, supervisory or personnel management, regulatory oversight, fiscal oversight; job specific skills or designations; and personal characteristics such as leadership and mentoring.

The Bank relies on management and staff with long tenures and deep institutional and customer knowledge to provide services, for this reason it is important to promote internally for key positions, whenever possible. There is a need to grow “middle” management potential, and it takes years to develop the skills and professionalism demanded by key positions. This succession plan will provide a road map for management and the Board to help build the future leadership of the organization.

As a case in point, in 2014, the Bank will lose a number of key people that have served the Bank and its customers well for many years. Ann Peters will be retiring at this year’s Annual Meeting after twenty-six years as a Corporator and twenty years serving as a Trustee. The Bank has benefited tremendously from Ann’s sage advice and her years of experience as Executive Director of Lamprey Health Care. I hope that you will join me in thanking Ann for her years of service at the Annual Meeting.

Dick Kaiser, Vice President and Senior Trust Officer will be retiring at the end of June after nineteen years of service. Dick’s level of devotion to the Bank and its customers has been exemplary. Many clients have come to rely on Dick’s caring advice and in many cases consider him an adopted family member. Succeeding Dick as the department head will be Kathy Donovan. Kathy has demonstrated leadership qualities during her thirteen years in the Trust Department that make her the ideal successor. Kathy has already assumed many of the responsibilities of running the department to allow Dick time to conduct a thoughtful dialogue with clients regarding department succession plans and his retirement, assuring a smooth transition of leadership and client care.

With several more key people retiring over the next one to five years, succession planning will be a major priority for management and the Board. By cultivating and developing the next leadership pool, Piscataqua Savings Bank will continue to serve Seacoast communities for years to come.


Richard M. Wallis, President/CEO

Financial Report

David H. Bryan, Treasurer/Financial Officer

The year ending 2013 was a solid year with respect to the Bank’s financial performance. Modest contraction of the Balance Sheet occurred. Consumers are becoming more comfortable with deploying funds in other than low-yielding bank accounts. Interest rates on the longer end of the curve rose markedly around the middle of the year and held relatively firm at higher levels to finish the year. The Bank’s adjustable-rate loan portfolio has been substantially impacted the last few years with the protracted low rate environment. Consequently, revenue was being generated through the sale and servicing of fixed-rate mortgages. That business has come to an abrupt halt with higher rates. Slowly, the Bank’s adjustable-rate product may be coming back into favor. However, just as businesses remain hesitant- so does the consumer. There are simply too many contradictions and too much potential vulnerability in economic indicators to stimulate abundant confidence. The build-up in core deposit funding was augmented further during the year. Management has worked diligently to maintain and improve the asset/liability mix on the Balance Sheet. Investing remains a huge challenge and management is maintaining patience in anticipation of further increases in rates. Limited forays have been made into longer duration holdings to enhance yield with minimal associated risk.

With the Net Interest Margin continuing its retreat and non-interest income falling off due to dwindling gains on loan sales, Net Income pulled back to $1.05 million in 2013 despite level operating expenses. The Trust Department continues to provide essential revenue in support of the Bank’s mission. Treatment favoring the Bank’s depositor/owners and the community in the form of higher deposit rates, lower service charges, and generous donations would not be possible without the Department. Bank management has always worked toward broad all-encompassing relationships within its market area. Being able to offer a safe haven and expertise in investment management for any stage in life along with outreach to local businesses and organizations provides the Bank with what has been a long-running and distinct high-reputation calling card.

Control of overhead was achieved in good measure during the year. Efficiency is being monitored closely. It is the measure by which management can quantify the percentage of a dollar needed to support the generation of that dollar. In the Bank’s case, it is taking approximately 82 cents in operating expenses to realize a dollar in revenue (refer to Net Income chart). This number increased with the continuing pressure on the Net Interest Margin and the reduction in non-interest income. Management looks for slow improvement with regard to the margin as 2014 unwinds. Further, there are positive indicators for enhanced revenue development in the Trust Department. Through capitalizing on a vast array of products and services offered without a costly branch network, the Bank continues to generate strong returns internally and for the community at large.

Another strong earnings year combined with a small shrinking of Total Assets enabled the Bank to augment an already strong Capital ratio in excess of 16%. For regulatory reporting purposes, the ratio actually exceeds 17%. 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 the community it has served for 136 years. 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.

Lending Report

Debra S. Perry, Vice President/Senior Loan Officer

It would be an understatement to say that 2013 was one of the most difficult years that we have experienced in the banking world. The terms Dodd Frank, “Ability to Repay” (ATR) and “Qualified Mortgage” (QM) became our theme songs. Countless hours were spent preparing for these new rules that took effect January 10, 2014. The ATR/QM rules are a provision of the Dodd-Frank Act adopted by the Consumer Financial Protection Bureau (CFPB) in 2013. The rules were the direct result of concerns that residential mortgage borrowers received loans that they were not adequately positioned to repay stemming from the financial crisis in 2007. The rules spell out specific requirements for lenders to use when determining a borrower’s creditworthiness and ability to pay. In addition, they specify certain servicing requirements, notification changes, and much, much more. The outcome was management and compliance personnel working diligently to update our current policies and procedures along with assuring that our loan origination system (LOS), document providers and core system were ready for the changes as well as training personnel. Fortunately, for us, some of the new rules will not apply as we fall under the “small creditor exemption” as defined by the CFPB (assets less than $2 billion and having originated fewer than 500 first-lien closed-end residential mortgages in the preceding calendar year). This exemption will give us an advantage over the “large lenders” who will have to follow a more rigid set of qualification and underwriting parameters. Early 2014 indicators suggest that we will likely pick up some additional volume because of this small creditor exemption.

At the beginning of 2013, refinance and purchase activity was brisk through the third quarter. In the local real estate market, bidding wars became commonplace again as inventory became scarce. Local realtors were very busy with interested buyers but there weren’t enough homes on the market to sell. However, with the government shutdown in October, consumer confidence fell and so did the origination activity. It became apparent to us that we were not going to reach our budgeted figures for portfolio and fixed rate originations. We had budgeted for $40 million in portfolio originations but fell short by $1 million and, year over year, the loan portfolio lost $1.4 million. Fixed rate originations also fell short of our budgeted $7.5 million by $2.2 million.

Despite the low origination numbers, our overall loan volume compared favorably to that of other lenders. According to Real Data Corp, Piscataqua Savings Bank was the fifth highest mortgage volume lender (out of approximately 250 lenders) in a market area made up of eight surrounding communities (Greenland, Hampton, North Hampton, New Castle, Newington, Portsmouth, Rye and Stratham). This volume represented a 2.8% share of the market; an improvement from 2012 when the Bank’s market share was 2.4%.

There are some good signs of a modest improvement in the local economy. According to the New Hampshire Association of Realtors (NHAR), Rockingham County experienced higher real estate sales on single family residential homes with 3,460 sales in 2013 up from 3,085 in 2012, or a 12.2% increase. Condo purchase activity also increased in 2013 up 16.8% from 2012 which represented 1,086 condo sales versus 930 in 2012. In addition to the higher sales volume the median sales price of a residential home increased from $260,000 in 2012 to $275,000 in 2013. The number of foreclosures throughout the state decreased in 2013 by 26% from 2012. This is the lowest of any year since 2007 according to data provided by New Hampshire Housing Finance Authority.

The national residential mortgage delinquency rate for banks, (those mortgages thirty days or more past due) continued to decline from 10.07% in 2012 to 8.21% in 2013. Piscataqua Savings Bank’s delinquency rate crept up a bit from 1.05% in 2012 to 1.27% during the same time period. The end of December historically has more past due loans as borrowers choose to pay off Christmas debt rather than their mortgages. In addition, with the loan portfolio shrinking, ratios would increase.

Operations Report

Joan W. Gile, Executive Vice President/Operations Officer

It has been said that today’s banking customer wants it all. Studies show increases in usage of all banking channels including ATM’s/Debit, online and mobile. Some customers may go years without visiting a bank lobby. However, when something comes up, such as handling an estate account or an unusual transaction, it is comforting to know that there is an experienced, trained, familiar banker here to help you. When you call the Bank, there is a real live person answering the phone to direct you to the person that can best help you. There are no menus to select from and voice mail is an option, not a requirement.

Technology and education were high priorities for the Operations Department in 2013 and this trend will continue in 2014. There are frequent updates and enhancements to the existing systems currently in place. We are also constantly looking for ways to improve efficiencies to deliver the best possible service. Some of the updates are also necessary to prepare us for future products and services. There was an upgrade to the Teller system, account opening platform and a significant upgrade to the system that transmits check images to the Federal Reserve Bank. The upgrade to the check imaging system was necessary to position ourselves to implement mobile check capture. With Mobile Capture, customers will be able to deposit checks using iPhone or Android devices instead of coming to the Bank. We plan to begin this project in 2014.

A major project for 2013 was the implementation of our mobile banking product, eMobile. Mobile banking is an adjunct to the online banking system. Over 200 Piscataqua Savings Bank customers have taken advantage of the convenience of banking from their mobile phones. Customers can check balances, transactions, transfer funds, receive text alerts and even pay bills from their mobile phone. One customer told me it was “the greatest thing ever invented”.

Technology projects will again be at the forefront in 2014. In addition to the necessary updates and enhancements, we are planning several projects. The first major project is a new ATM. This will be a state-of-the-art ATM with voice capabilities for the visually impaired as well as the ability to image checks that are deposited on the receipt.

Also during the first quarter of 2014, we will be developing custom Mobile and iPad applications that will be available in the Apple and Android stores. This will make mobile and tablet banking easier to download, install and use.

Staff Development

Education is very important in providing quality expert service to our customers as well as developing employees for future leadership roles. Employees in all departments of the Bank have spent much time and effort taking classes and attending banking schools 2013. The programs attended have included Principles of Banking, Law and Banking, Customer Relations, Supervisory Skills and Real Estate Lending. “Education is very important in providing quality expert service to our customers as well as developing employees for future leadership roles.”

There are several more advanced programs designed for individuals who are looking for more enhanced career development. Laurie Trombetto, (Deposit Operations) attended the Northern New England School of Banking this past fall. This is a one-week program that takes an introductory look at banking and bank management.

Kate McManus (Finance Administrator) will be completing the New England School for Financial Studies, a two-year banking program at Babson College.

Tony Cabral (AVP/IT Officer) is currently enrolled in the Stonier Graduate School of Banking. This is a three-year graduate level banking program held at the Wharton School of Business at the University of Pennsylvania in Philadelphia.It is exciting to see employees who are enthusiastic about furthering their banking education and careers. We appreciate the time and commitment these employees have put into their classes.

Trust/Investment Department Report

Kathleen N. Donovan, Vice President/Trust Officer

The recent Corporators’ Newsletter summarized the year in our department as one of transition, growth and opportunities. As Vice President & Senior Trust Officer Richard Kaiser looks forward to his retirement in June, a thoughtful transition of his clients to their new team is under way to continue the personal relationships he has nourished for many years – decades in some instances. We are fortunate to have a very long-term and loyal client base made up of Bank customers, friends, colleagues and families through the generations. The Bank’s unique model and excellent reputation in the community has created opportunities as the bigger banks keep getting bigger and less personal while we tout old-fashioned banking with the convenience of modern technology.

The Bank’s overall focus on relationships from the young to the elderly, and every age in between, works well with the services offered in our department. We are able to help with complex pieces of life &endash; estate planning, investments, financial planning, taxes, and family dynamics. It is an honor and privilege to assist clients in determining their objectives and then helping to pull their team together to implement the documents and strategies to help them reach those goals in an honest and caring manner.

New Business Report

Our market value continues to increase steadily, ending 2013 at a high of $214.4 million (up 6.37% over 2012) despite heavy deceased client distributions. Market appreciation accounted for over 59% of the increase in assets under management, while new assets made up the remainder. Revenue was at a high of almost $1.6 million, but it was offset by high expenses due to a combination of factors including transitional salaries, technology and increased overhead. This was anticipated in the budget which we surpassed by $38,500 ending with $67,800 in net income. Our managed growth model is to gradually increase the average account size and overall market value without significantly increasing the total number of accounts/relationships managed. We ended the year with 386 accounts bumping up the average account size to over $555,000, with the largest account at roughly $12 million.

Who Are We and What Do We Do?

There is ever-increasing competition among banks, especially in the Seacoast area. You may have noticed just how many banks from outside the area have opened offices in Portsmouth. The investment side also has competition from Registered Investment Advisor (RIA) firms and brokerage models as well as banks providing fiduciary services or their non-depository trust company alternative. As a regulated bank trust department, we are held to the highest fiduciary standards with a commitment to maintaining our duty of loyalty to the client in an ethical, bonded and secure environment – something we are very proud of and which resonates well with clients.

In alignment with the Bank’s overall mission, what makes us different is our focus on providing exceptional personalized services in the best interest of the client, without the sales culture or compensation based on commissions or bonuses which might encourage decisions not in the client’s best interest. If what we do works well for the client, then it will also work well for the Bank with increased market share and a loyal client base. Efficiencies help us maintain a highly competitive fee structure which has seen little change in over a decade.

Staff & Development:

We have a highly qualified team committed to their certifications (all of which have ethical oaths and high standards) and/or related continuing education requirements to assure that knowledge and skills remain current. Sometimes it is difficult to know how much relevant background someone really has, and this is one way to demonstrate a baseline of knowledge and expertise. It is the many years of experience using those skills, however, which means the most. Designations we have on our team:

  • CTFA (Certified Trust & Financial Advisor): Both Kathy Donovan and Laura Prescott have this designation in their role as Vice President & Trust Officer along with many years of experience providing professional fiduciary services. Macey Roberge, Trust Administration Assistant, will complete her third year of Cannon Financial Institute’s graduate-level Trust School (Trust III) this summer and will have the opportunity to take the CTFA exam at that time.
  • CFA (Certified Financial Analyst): Our investment officer, John Fredette, received this designation after demonstrating mastery of the current CFA graduate-level curriculum and passing a series of three six-hour examinations along with other criteria and experience. He implements strategic asset allocation and investment strategies in the portfolios in conjunction with the appropriate objective assigned to each account.
  • CSOP (Certified Securities Operations Professional): Nona McKenzie is a recent addition to our operations team with extensive experience and background in the trust operations area. As a Trust Operations Specialist, she has been able to drill into special projects, research efficiencies and facilitate upgrades in support of our very busy and long-term team which includes Gail Armsden, Heidi Byers and Joanne Ouimet.
  • “Chief”: MaryAnn James has been the Executive Secretary in the department since 1995 (and has worked with Dick Kaiser since 1983!). She will be retiring at the end of this year and will be missed. There are no official designations for this role, so “Chief” will have to do.
  • Continuing Education: We continue to host Cannon Teleconference Luncheons which provide continuing education credits and a wealth of information for attorneys, accountants, CTFAs, FIRMA (The Fiduciary and Investment Risk Management Association, Inc.) members, etc. These have provided a great opportunity to network with other professionals and share discussions about topical matters that could affect all of us in the estate planning arena. The ABA Wealth Management & Trust Conference, a national conference attended annually, is truly a wealth of information and resources. Various webinars, seminars and other opportunities enhance and support the skills and systems in place, and all staff members are encouraged to participate.