ANNUAL REPORT 2016
There were glimmers of economic improvement in 2016 after what has been a decade of challenges. The Federal Reserve Bank raised the Federal Funds rate on December 14th by one quarter of one percent, only the second increase since December 16, 2008 when the rate was lowered to virtually zero percent. Loan originations exceeded our expectations. Deposit flows continued to provide the Bank with some positive growth. Bank Operations rolled out a number of new products to make banking with Piscataqua Savings Bank more convenient and secure. In addition, the Trust Department reached new highs for assets under management with the help of a strong stock market. All of this and more will be outlined for you in this report.
Consumer preferences and banking services change at an ever increasing pace. It is important that we keep up with these preferences and make sure we are offering customers the banking services they demand. There has been a lot of talk about the next generation of bank customer, the Millennials, those 18 to 35 years old. What are their needs and demands for banking products? It was a strategic question we asked ourselves in 2016 in an effort to remain relevant and attractive to new customers. To help us answer some of these questions, we asked Andy Smith, Ph.D. of the University of New Hampshire Survey Center to conduct a focus group of 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; how they obtain financial education; how social media affects their selection of a financial institution; the importance of a branch network and the amenities within the branch; and whether it was important that the bank they do business with supports the local community. Although the information we received from the group was helpful in determining product offerings and services that will attract customers in this age group, we will also make sure not to make changes at the expense of our current customers. We are very fortunate to have very loyal customers from many families that have been banking with Piscataqua Savings Bank for generations.
In 2017, the Bank will be celebrating its 140th anniversary. This year also marks the beginning of a major Bank renovation. Although not readily noticeable to the public, the Bank property is actually made up of four buildings. Each one was added at various times over this 140 year history. Most of the Bank’s public space is on the first floor with the exception of the Trust Department. It has become evident over the past few years that, as the Bank continues to grow, there is a need for more space and that it is time to utilize the upper floors of these buildings. This is also an opportunity to make changes to improve customer access and the overall customer experience as well as improve adjacencies between departments. Enhancements will include an elevator to the upper floors and improved access from the parking lot. You may recall that this project began back in 2015 when we conducted a space needs study and received input from
Corporators, Board, and staff. This is a very exciting project and we look forward to sharing these plans with you.
With all these changes there is one thing that remains steadfast- the unique brand of customer service that Piscataqua Savings Bank staff offers our customers. I consider myself fortunate to work among a group of people that truly care about the people they serve.
Thank you all for your commitment to Piscataqua Savings Bank and for your ongoing advocacy.
Richard M. Wallis, President/CEO
David H. Bryan, Vice President/Treasurer
The year ended 2016 significantly exceeded expectations for deposit growth on the Balance Sheet. Operating expense challenges and a persisting low-rate environment through most of the year hampered earnings. Signs of life emerged in the economy during the second half of the year after a very slow start. The unemployment rate continued to decline, and there was a modest uptick in inflation indicators. Financial markets were most roiled in late June and early July with the United Kingdom vote to leave the European Union, as the U.S. Ten-Year Treasury Note hit an all-time low of 1.318% Myopic growth rates across the globe and central bank accommodative policy including negative interest rate deployment were dominating the conversation. Stabilization of a flagging energy sector and companies adjusting to what has been a very strong run-up in the dollar got things moving domestically. Great Britain’s referendum to leave the European Union (Brexit) failed to gain any significant traction as an ongoing concern. And then there was the upset of all upsets in the U.S. presidential election when Donald Trump’s protectionist message resonated with enough blue collar workers in the ‘rust belt’ of America’s heartland to carry him to victory. Mr. Trump’s platform of fiscal stimulus including tax cuts and infrastructure spending sent a reflationary message to the bond market that created a strong shift in the yield curve during the last couple months of the year. With rates rising and the curve steepening, the call was relatively easy for the Federal Open Market Committee of the Federal Reserve to make another twenty-five basis point increase to the short-term federal funds rate at their December meeting. Needless to say, financial stocks in general rallied, and the Bank began to reap the benefit of higher loan and investment yields. The healthy deposit growth is a result of top-tier offering rates in the Bank’s market area, and the funding can be put to work profitably.
It was another year marked with the challenge of putting money to work in the investment arena. Maintaining the Bank’s five-year maturity ladder and low rates kept the portfolio yield down. The ladder is well structured with a head start on year 6 (2022), and evolving corporate/municipal bond segments along with mortgage-backed securities (MBS) should start leading the Bank to higher yields. Additionally, cash flow from amortizing MBS provides reinvestment dollars with rates potentially on the rise. With an ongoing tame inflation outlook, management has been extending modestly in duration to capture additional yield; however, the only final investment maturities beyond fifteen years are twenty-year amortizing mortgage-backed pools.
In terms of earnings, the Bank’s bottom line came in below the 2015 level. Essentially flat year-over-year Net Interest Income was bolstered by increased non-interest income in the form of the Bank’s loan sale activities and Trust Department fees. This increase in total income was off-set by an increase in operating expenses. Staff development related to succession planning along with higher pension and health insurance costs moved salary and benefit expenses higher. The Bank’s activity in correspondent and secondary market lending activity also resulted in an increase to overhead. 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 is also entertaining alternative investment strategies. 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
Swimming against the proverbial tide is how I would sum up lending results for 2016. Once again, consistently low interest rates coupled with an extremely competitive market resulted in substantial payoff activity. Despite a brisk year of originations, the loan portfolio ended the year down by $2.3 million. Borrowers continued to seek a fixed rate product and for our customers that meant applying for a loan that we sold on the secondary market. Not only did these loan products have dollar limits that often did not meet our borrowers’ needs in the high cost Seacoast area but some of our borrowers did not meet secondary market guidelines for various reasons including debt-to-income ratio or certain characteristics of the property. As a result, the borrowers’ quest for a fixed interest rate often led them to our competitors who were offering a non-conforming portfolio fixed rate loan product. This non-conforming product provides the borrower the benefit of a fixed rate without having to meet secondary market guidelines. The product is priced slightly higher than a conforming fixed rate. In order to continue to fulfill the credit needs of our community and deter competition, the Bank created a non-conforming portfolio fixed rate loan product. This allows us the flexibility of offering a fixed rate to our borrowers who otherwise would not have qualified on the secondary market, and to retain or obtain them as valued customers. We have also added two new correspondent loan relationships and now have a total of four. Our correspondent loan relationships are located locally and enable us to grow the portfolio while building new customer relationships that we wouldn’t necessarily have gotten otherwise. I personally
“We strive to offer the same products and services of the big banks, but with a small town attitude.
received a phone call from one of our new correspondent borrowers who is very well known and successful in the area and was thrilled that his loan ended up at PSB. Another correspondent borrower came in and he, too, was thrilled and was in the process of moving some of his other accounts here. We are already seeing positive results from these changes.
Meanwhile, real estate sales were strong and home values continued to rise. According to a report from the New Hampshire Association of Realtors (NHAR), the New Hampshire 2016 residential housing market saw the largest number of annual home sales in their tracking history (1998 to present) and the highest median price since 2007.
The Bank’s mortgage delinquencies, thirty days or more past due, improved from 1.81% at the end of 2015 to .72%. Overall, delinquencies remain very manageable at the Bank. Nationally, the mortgage delinquency rate also continues to improve from 5.27% in 2015 to 4.25% at the end of 2016. New Hampshire’s economy is doing well. According to the New Hampshire Business Review, our unemployment rate is just 2.7%, the lowest since 2001; NH added 17,000 jobs in 2016; bankruptcy filings have been on the decline for the past five years, falling an additional 7%, and foreclosures are back down to where they were before the recession.
Joan W. Gile, Executive Vice President/Operations Officer
How do you like to do your banking? There are many choices and we all look for different experiences. Many customers enjoy coming into the main lobby where they are greeted by name. It can be a very social event, exchanging stories of work and family. However, some customers desire a quick transaction and prefer the convenience of the walk-up and drive-up where they can be in and out swiftly. And then there are those who do not want to come to the Bank at all, preferring online access to their accounts, online bill pay and mobile deposits. One thing all Piscataqua Savings Bank customers seem to have in common is that if the need arises, they know that someone will answer their phone call and direct them to a specialist who will assist them.
Piscataqua strives to offer the same products and services of the big banks, but with a small town attitude. Keeping pace with evolving technology and changing customer preferences is challenging. Back office infrastructure needs constant updates to help us remain agile in the ever-changing marketplace. The improvements in the back office processes also help us maintain culture and uniqueness without having to add staff and increase our infrastructure.
For example, last year we updated our wire transfer system to create efficiencies in the process. The system can email customers when a wire transfer has been sent and automatically posts transactions to accounts. This greatly reduces the time and steps involved in completing a wire transfer. We implemented several changes to our debit card program that also increase efficiencies as well as help counteract fraud. We began reissuing the EMV (Euro MasterCard Visa) chip cards in late summer. These cards use micro-chip technology to store information that cannot be stolen by skimmers. We implemented a new system to make changing PIN numbers more convenient. Customers can simply call to make changes instead of having to come into the Bank. We enhanced our new fraud detection system that will contact customers at night and on weekends if potential fraud is detected. Lastly, the CardValet® App was added to our product line to enable customers control of their card usage.
Last year there were several updates to our online and mobile banking systems to prepare for future enhancements. The biggest change was the introduction of expanded account history that is available online from 60 days to 18 months. The use of our Mobile App increased tremendously last year, especially usage of mobile deposits. On average, there are over 175 deposits made by mobile phones each month.
The pace will not slow down in 2017. We have either completed or begun working several projects. There are more updates to online banking that will vastly improve user experience. Our Mobile release included touch ID (logging in with a finger print instead of a password) and the ability to view checks that have cleared. We have added loan payment notices to our eStatement delivery channel. We will be updating our ATM Machine to be able to accept EMV chip cards. And by the end of the year we plan to be able to instantly issue new debit cards at the Bank. These will be temporary cards that can be used while the permanent card is ordered and mailed. Customers who need a new or replacement debit card will be able to walk out of the Bank with a working card in hand.
Lastly, in the back office, we will be implementing a new accounts payable system. We are constantly evaluating our products, services and processes so that we can provide the banking experience to meet all our customers’ needs.
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.