ANNUAL REPORT 2018

what's new

President’s Message

Strengthening Mutuality

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.

Respectfully,

Richard M. Wallis, President/CEO

Financial Report

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.

Lending Report

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.

Operations Report

Joan W. Gile, Executive Vice President/Operations Officer

Renovation Update

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.

ATM Fees

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.

Physical Plant:

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.

Cybersecurity:

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.

Creature Comforts:

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.

Staffing:

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.

Investments

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.

ANNUAL REPORT 2017

what's new

President’s Message

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.

Respectfully,

Richard M. Wallis, President/CEO

Financial Report

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.

Lending Report

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.

Operations Report

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.

Investments

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.

ANNUAL REPORT 2016

what's new

President’s Message

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.

Respectfully,

Richard M. Wallis, President/CEO

Financial Report

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.

Lending Report

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.

Operations Report

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.

Investments

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.

ANNUAL REPORT 2015

what's new

President’s Message

Looking to the future of Piscataqua Savings Bank was the theme for 2015. The Board of Trustees and management completed an update of the 3-5 year strategic plan. The goals that resulted from this planning address the fast-paced changes occurring in the financial services industry. Being relevant to the next generation of bank customers while continuing to serve existing customers, in a manner they are accustomed, will be key to the Bank’s success.

In addition to strategic planning, a group of forty Corporators, Board and Staff met for a “Town Hall” meeting as part of a facility space needs study to discuss what makes Piscataqua Savings Bank special. As we plan for our future space needs, it is important to have an understanding of those facility features that should be retained, enhanced and/or eliminated. Resoundingly, the attendees agreed that: the current location is important to retain; staying in one location lends to the Bank’s unique way of serving customers and the community; and any facility design changes should enhance accessibility and the customer’s banking experience.

In December of 2015, the Federal Reserve raised interest rates amid signs of an improving labor market and economy, but additional rate hikes have been delayed due to concerns over other world economies. In August, the stock market experienced one of the largest corrections seen in several years creating uncertainty for many investors. Despite all this uncertainty, the Bank continued to grow while maintaining a strong capital position thereby providing a safe harbor and peace of mind for customers.

The Seacoast market has become a cure-all for banks from other regions of NH as well as out-of-state banks. Over the past few years there have been a number of banks that have opened offices to take advantage of the strong Seacoast economy. The Bank’s reputation and product pricing place Piscataqua Savings Bank among the most competitive banks in the area, but this new and existing competition will keep us ever-vigilant.

Long-tenured staff supports the existing culture and institutional knowledge of the organization. When possible, promoting from within preserves this culture and provides opportunity for those who are committed to the ideals of the organization. However, hiring the right person from outside the Bank brings in new talent, skills and perspective that provide our customers with expert knowledge and solutions. In 2015, we were fortunate to be able to both promote from within and hire staff to support the exceptional customer service for which Piscataqua Savings Bank is known.

At the core of the Bank’s staffing changes is a succession plan. The plan is a management and Board tool that helps: identify areas of the Bank that need staffing; develop existing staff; and keeps a forward-looking eye on key positions that will need to be replaced or supported. Successfully replacing long-tenured key positions is so important in maintaining the customer/community-centric culture of the Bank.

Last year the Annual Meeting of the Corporation was a successful evening event intended to better accommodate those Corporators with work conflicts and it also provided an opportunity for you to meet all of the Bank’s officers. Again this year the meeting is being held in the evening and is a Corporator-only meeting. We are working on scheduling a Corporator Social in the evening on Tuesday, September 6, 2016 aboard the M/V Thomas Laighton when spouses and guests will be welcome. More information on the Social will be coming, but in the meantime please mark your calendars and save the date. We look forward to seeing you all at the Annual Meeting on May 18th.

Respectfully,

Richard M. Wallis, President/CEO

Financial Report

David H. Bryan, Vice President/Treasurer

The year ending 2015 was a strong year for deposit growth on the Balance Sheet. While the economy continued to plod along at a moderate pace, financial markets were generally sluggish. Various world events and currency fluctuation caused some periodic volatility in stocks. The fourth quarter brought the long anticipated Federal Reserve move to raise interest rates. A flattening of the yield curve with some upward movement on the long end pressured bonds. Labor market indicators remained positive. Even the flagging employment participation rate’s freefall seemed to bottom out. Commodities, particularly oil, were hit very hard. A surging dollar put a crimp on the manufacturing sector and export companies. Lower gas prices did not result in robust consumer spending with the savings rates moving upward. Customers at the Bank have been stretching longer in seeking a return with substantially more money pouring into the five-year certificate product. Strong local standing and presence in the community appear to be reaping continued benefit with core deposits building.

Loan balances in the Bank’s portfolio were flat. Deposit funding growth not put to work in the lending area had to be invested. Management continued to develop the investment portfolio through increased diversification into various sectors along with evolution of the maturity ladder. A tame outlook with regard to inflation has made the decision-making process a bit easier in terms of extending longer with some purchases to capture additional return. Strategically placing additional money in mortgage-backed securities has also ensured an increasing return of additional monthly cash flow.

In terms of earnings, the Bank came in at near the same level as 2014. The Net Interest Margin came under pressure with the slumping loan portfolio and a modest uptick in the cost of funds. An increase in rates to drive the Bank’s interest income did not materialize during the year. Non-interest income continues to be bolstered by a growing Trust Department. Operating expense control was critical in maintaining the bottom line. Management continues to be hopeful with respect to a positive impact on Net Interest Income in the near term through the rate environment. 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.

Lending Report

Debra S. Perry, Vice President/Senior Loan Officer

It was an interesting albeit frustrating year in lending in 2015. Our loan portfolio remained virtually flat as persistent low interest rates coupled with an extremely competitive market resulted in substantial payoff activity. In one of every five transactions during 2015 the borrower selected a fixed-rate product which the Bank does not hold in portfolio and is subsequently sold into the secondary market. Additionally, many of our borrowers took advantage of the lower rates and modified their existing loans. Although we are always grateful that we don’t lose the borrower, modification transactions do not help expand the existing portfolio. Meanwhile, Seacoast real estate sales were strong and home values continued to rise. The Seacoast Board of Realtors, in an analysis of its 13 sample communities, reported that single-family sales easily set a new volume record of 1,165 units at a combined record median sale price of $398,500, 7.7% ahead of last year’s median sale price. “Any way you look at it, 2015 was a huge year for Seacoast real estate” said Linda Ruppe, President of the Seacoast Board of Realtors. One of the state’s leading economists, Russ Thibeault of Applied Economic Research, recently stated that “both the New Hampshire economy and the housing market are performing well and are likely to continue to perform well next year.” In addition, he declared that “the state unemployment rate of 3.6% is among the lowest in the country and is lower still in the Seacoast, owing to the success of job creation at the Pease International Tradeport” which he described as a huge success.

All of this news serves as a huge source of frustration because we certainly see this strong purchase activity as an opportunity to build our loan portfolio with new borrower relationships. As mentioned earlier, the competition is fierce and we are seeing more and more lenders moving into this market area. The Warren Group© provides data that compares our lending activity to over 250 other lenders in the Seacoast area. The data indicates that we have a strong presence as a residential lender in the Seacoast purchase market. Our lending activity in Portsmouth represented 6.1% of the market overall and we were ranked third out of hundreds of lenders. We continue to look at new lending strategies to offset this competition and to continue to fulfill the credit needs of our community.

The Bank’s mortgage delinquencies, 30 days or more past due, increased from .85% at the end of 2014, to 1.81% at the end of 2015. The increase was due to the holiday season with borrowers choosing to pay for gifts instead of paying their mortgages. It should be noted that the ratio dropped back to .56% in January of this year. Overall, delinquencies remain very manageable at the Bank. Nationally, the mortgage delinquency rate continues to improve from 6.71% in 2014 to 5.27% at the end of 2015.

Operations Report

Joan W. Gile, Executive Vice President/Operations Officer

For the past several years, Piscataqua Savings Bank has been concentrating on the development and implementation of products and services to give customers choices for their banking experience. Customers who choose high touch can come into the Bank where a highly qualified and experienced staff member will take care of all of their banking needs. When customers call, someone answers and directs the caller to the appropriate specialist. There are no automated menus to choose from and no computers to talk to. Having one office means that there is always a manager or senior officer available to answer any question or make a decision in a timely and efficient way. For customers who enjoy technology, we have many options to meet any banking need:

Online Account Opening and Online Mortgage Application – New and existing customers can open an account or apply for a mortgage online in the comfort and convenience of home.eBank Online Banking – Customers can monitor account activity, view transaction history and copies of checks, transfer funds and pay bills easily from their

own computer. With Popmoney®, they can make payments to anyone via an email address or cell phone number. eMobile – When customers are on the go there is 24/7 access to their money. They can check their account balance or transfer funds between accounts or even pay a bill from their phone or tablet, anywhere, anytime.

eDeposit – This is an added feature with our Android® or Apple® app for mobile devices. This feature allows the ability to deposit a check by taking a picture of the front and back of it with an Android phone, iPhone or iPad.eAlerts – Customers can stay on top of account balances and transactions with eAlerts. An email or text message can be sent each time a specific event occurs such as when reaching a balance threshold, transactions are posted, or checks are being processed.

The safety and security of our customers’ information is our top priority and all our systems maintain the highest level of security the industry has to offer. Our technology suite of products integrates seamlessly to enable customers to manage accounts from a variety of devices. Our commitment to providing current technology enhances our commitment to providing personal customer service. Our office is open and inviting and we encourage everyone to come in and talk to us any time. As the Bank’s Value Statement says: We are the friendliest bank in town.

Trust/Investment Department Report

Kathleen N. Donovan, Vice President/Trust Officer

The year 2015 was an interesting one in many ways, and the most often-repeated conversation with clients begins with how Piscataqua is “different”. The Bank has a great reputation in the community in terms of personalizing its services and contributing locally on many levels, and our department carries out that mantra as well. We are mindful of our niche in providing fiduciary and investment management services in a customized manner, and appreciative of both our internal and external referral sources. Recently it was pointed out to me that we are like Goldilocks and the Three Bears – not too big, not too small, just right. We are small enough to be nimble and able to apply common sense solutions with all decision-makers on site, and large enough to have a talented team of experts and robust operating infrastructure.

Staffing News – Welcome Brianna!
In December we welcomed Brianna Adams as a new Vice President/Trust Officer. She has quickly become a valuable member of our team with more than 10 years of fiduciary experience in estate and trust administration (most recently as a regional fiduciary officer for a Boston trust company where she facilitated successful solutions for her clients).

Brianna obtained a Master of Laws degree in estate planning and Juris Doctor from the University of Miami School of Law, as well as a Bachelor of Arts degree from Bates College. She is a member of the Maine, New Hampshire and Florida Bar Associations, has been a wish grantor and fundraiser for the Make-A-Wish Foundation® and served as a court-appointed special advocate representing the interests of abused, neglected and abandoned children. Brianna has been meeting clients, community members and local professionals while embracing the Seacoast area as her soon-to-be new home. Stop by and say hello!

Our Profile and 2015 at a Glance:
Strategically, our profile remains consistent in terms of composition and overall number of accounts and relationships as we thoughtfully welcome new clients while settling and closing estates and trusts. Growing our fiduciary relationships is an important component and we understand that the Bank has been named in many estate planning documents based on our local and personalized services. We are also pleased to offer customized investment management services for IRAs, individuals, trusts and non-profit organizations.

Investments

John P. Fredette, CFA/Trust Investment Officer

On the investment side, 2015 was a challenging year of low and negative returns. The S&P 500 Index ended down on a price basis; however dividends and their reinvestment helped push the index to a small positive total return of 1.38%. The Barclays Aggregate Bond Index returned .55%, while tax-exempt municipal bonds returned 3.30%.

Oil’s significant decline and the dollar’s substantial move upwards, coupled with policy divergence expectations and Chinese growth scares, helped remind investors that volatility does exist and risky assets are not a panacea to low bond yields. While oil’s decline does have repercussions, there are more positives than negatives in such a substantial decline specifically for importers of the commodity and consumer oriented economies.

The market will have to deal over the coming months with a Federal Reserve rate hike possibility in June, monetary policy divergences, a contested U.S. presidential election, reform / stability / currency / debt issues in China, fears of the British withdrawal from the European Union (Brexit) and high yield defaults rising in addition to other risks. Volatility is playing out after years of the Federal Reserve suppressing it, and with volatility comes opportunity. Lastly, one must remember that the stock market has predicted 11 of the past 27 recessions. That equates to 16 false alarms in the last sixty years. Unfortunately, the “glass is half empty crowd” would respond, “economists have yet to forecast even one recession.”

ANNUAL REPORT 2014

what's new

President’s Message

As you will read in this annual report, 2014 was another successful year despite the head winds created by continued low interest rates and ever increasing regulatory burden. Also, new milestones were reached as 2014 came to a close, including anniversaries and record business levels.

This year marks the 25th anniversary of the Kids’ Bank and the 20th anniversary of the Trust Department. The Kids’ Bank window was created in 1990 to provide children their own teller window to conduct transactions. We have many families that enjoy coming in on Saturday mornings to deposit the children’s allowance, birthday money or money they earned doing chores. It is a fun and interactive way to teach children important fiscal lessons that will last a lifetime. In celebration of the anniversary, the Bank will be hosting events throughout the spring and summer months including participation in Pro Portsmouth’s Children’s Day and participation in a national initiative called Teach Children to Save Day, an outreach program, in conjunction with local schools, that teaches children the importance of saving.

New all-time highs were achieved for net loans in the Loan Department and assets under management in the Trust Department. The loan portfolio has doubled over the past ten years, while the Trust Department has seen similar growth. This growth is a testament to the high level of customer service and the reputation of the Bank.

The Bank has reached for yield in this low interest rate environment by investing in securities and mortgages with slightly longer maturities or rate lock periods; however, the Bank’s balance sheet continues to be well positioned for when the tables turn and interest rates begin to rise.

At the beginning of 2014, the Board and management hired The Long Group, a banking and insurance industry consultant firm, to conduct a study of the Bank’s market area. The Bank will be exploring options to meet facility space needs over the next couple of years, but before we invest valuable resources into a renovation project, it was important to understand whether our one office retail banking model is sustainable. The study allowed us to gain a better understanding of the geography of the Bank’s primary market area, the demographics of the market and our customers, and evaluate the total demand for financial services within that market area.

The results showed that the Bank has an opportunity to deepen its account relationships with existing customers while at the same time target those new customers most prone to bank with PSB. With a better understanding of our customers we will be better prepared to tailor products and services to meet their demands. With the use of technology products, such as online and mobile banking, the Bank will be better able to develop customer relationships with those that reside in the outskirts of our market area.

In the past, the Annual Meeting of the Corporation was held in the morning. This year, it was decided to try an evening meeting to better accommodate those Corporators that have work conflicts and provide an opportunity for you to meet all of the Bank’s officers. Even though the meeting is being held in the evening this will be a Corporator only meeting. We will attempt to schedule a Corporator Social for later in the year when spouses and guests will be welcome. We look forward to seeing you all at the meeting.

Respectfully,

Richard M. Wallis, President/CEO

Financial Report

David H. Bryan, Treasurer/Financial Officer

The year ending 2014 was another good year with respect to the Bank’s financial performance. An improving asset composition on the Balance Sheet was the highlight of the year. Robust loan portfolio growth helped maintain reasonable earnings in a continuing brutal interest rate environment for the financial services industry. Interest rate gains on the yield curve at five years and longer held fairly well during the early part of the year but were largely given back in the waning months of 2014. Management was able to augment the loan portfolio through continued underwriting of a very popular 10/1 adjustable-rate mortgage product. Deposit growth was anemic for the year but better than the modest contraction experienced in 2013. The growth in Loans of over $10 million was funded largely by a shrinking investment portfolio (maturities and sales) and a reduction in cash. Management is pleased with the rebound in lending in terms of serving the community and maximizing the generation of income. Economic indications nationally and locally appear to be signaling some traction with respect to expansion. Consumer confidence has rebounded substantially, and businesses appear to finally be investing again. Wage growth is still lagging, and fewer people are participating in the labor force; however, a slower pace of growth appears sustainable- including in the slow to heal housing and construction sectors. The stock market has continued to perform reasonably well, and the Bank is likely losing some deposit funds in that direction. Having said that, it was another strong year for checking and savings account balances. These types of accounts can help build relationships over the longer term and often stem from a mortgage offering to a new customer.

A positive evolution on the Balance Sheet with regard to asset composition and somewhat better interest rates for the better part of the year led to a resurgent Net Interest Margin. In controlled fashion, management has extended the duration of some of the Bank’s loan and investment holdings. The search for yield has prompted some in the industry to take on more credit risk. Bank management has chosen to selectively deploy funds into some longer-term assets. There is some interest rate risk associated with this practice, but asset/liability modeling tells us it is measured and well within prudent parameters. Non-interest revenue was largely in line with the previous year thanks in part to burgeoning assets under management in the Bank’s Trust Department. Shrinking gains taken on fixed-rate loan sales were replaced by increased revenue from the fiduciary area.

Management did well to maintain operating expenses nearly level with the preceding year. An improving Net Interest Margin helped reduce the Bank’s Efficiency ratio from 82 cents to 78 cents (the amount required to generate a dollar in revenue). A continuation of strong fiduciary fee income bodes well for the Bank’s efficiency as well. Overhead is further mitigated by a no-branch operation. Another strong earnings year combined with little increase in Total Assets enabled the Bank to augment an already strong Capital ratio in excess of 17%. For regulatory reporting purposes, the ratio exceeds 17.5%. 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 depositors (owners) and the community at large. That formula is helping to launch the 138th year. 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

What sets our Loan Department apart from others: excellent customer service, experienced loan officers and loan support personnel, the ability to underwrite, process, originate and service our own loans, excellent team work and the longevity of our employees that creates longtime relationships and consistency for our customers. I am very proud of the Loan Department and the challenges that they face every day. Everyone in the Department is cross-trained and wears many hats; unlike other lending institutions that have an underwriting department, a loan processing department, originators and a servicing department. There are only six individuals, not including myself, that take on these tasks every day. This small department originated 124 loans in 2014 for a total of $36 million and grew the loan portfolio by $10.8 million. In addition, they have to keep up with the onslaught of new loan regulations that have taken effect and the pending ones still to come. It remains to be seen whether some changes will need to be made in the Department because of the regulatory burden.

New home purchases made up the biggest part of our origination activity in 2014 as it represented nearly 75% of our total originations. I am excited to share that for the year 2014, we were #1 in total purchases in the City of Portsmouth, when compared to over two hundred and fifty (250) other lenders, according to Real Data Corporation©. This is a company that surveys other lending institutions and compares our loan activity to theirs in surrounding towns in the Seacoast area. Overall, we were 5th in total loan purchases in the Seacoast area. According to the New Hampshire Association of Realtors (NHAR), Rockingham County real estate sales of single family residential homes totaled 3,460, down just four sales from 2013. There was a 5.4% increase in the median sales price from $275,000 in 2013 to $289,900 in 2014. Prior to the mortgage crisis in 2007, the median sales price in 2005 had reached a high of $337,500. NHAR calls 2014 a year of stabilization, with unit sales down just slightly and median sales prices ahead slightly.

The Bank’s mortgage delinquencies, thirty days or more past due, were .85% of total mortgage loans on December 31, 2014, which is an improvement from December 31, 2013. Overall, delinquencies remain very manageable at the Bank. The State of New Hampshire’s mortgage delinquency rate at the end of December 2014 was 5.7% and the national mortgage delinquency rate was 6.71%, both showing improvement from 2013. The Bank experienced one foreclosure in 2014. We are fortunate that we are able to work with most of our delinquent borrowers and set up mutually agreeable repayment plans for them. In comparison, according to data provided by New Hampshire Housing Finance Authority, the total number of foreclosure deeds in the State of New Hampshire for 2014 was 2,074 which was essentially equal to the number recorded in 2007. December of 2007 was the official start of the Great Recession in the United States according to the National Bureau of Economic Research. In addition, 2014’s total foreclosure deeds in New Hampshire were 47.5% lower than the 3,953 recorded in 2010, the greatest number of foreclosures in a calendar year during this cycle.

Numerous changes have impacted compliance efforts due to amendments enacted under the Dodd-Frank Act that went into effect on July 21, 2010. In 2014 we dealt with the new Qualified Mortgage and Ability to Repay rules (QM/ATR) that changed the way we qualify our borrowers for a mortgage loan. Currently, we are bracing ourselves for the most monumental change of all that takes effect on August 1, 2015, the Integrated Disclosure Rules. The end result will combine the Good Faith Estimate (GFE) and initial Truth-in-Lending disclosure (initial TIL) into a new form, called the Loan Estimate. The HUD-1 and final Truth-in-Lending disclosure will be consolidated into another new form, called the Closing Disclosure. These changes are designed to provide information that will better assist consumers in understanding all of the costs of the transaction. Management has been and will continue to spend a considerable amount of time preparing for this next round of changes.

Through it all our greatest goal is to remain true to our mission by continuing to fulfill the credit needs of the Greater Seacoast community.

Operations Report

Joan W. Gile, Executive Vice President/Operations Officer

The Operations Department has been continuing to focus on technology and the changing trends in banking. A new ATM was installed early in 2014. This machine is state-of-the-art with voice capability for the visually impaired. It will also place an image of a check being deposited on the receipt. There has been a steep learning curve for both customers and employees on the use of the machine. There will be additional changes coming as we prepare for EMV (Euro MasterCard Visa) chip card technology that will be implemented for debit card issuances in the near future. EMV cards will contain microchips that cannot be duplicated which will help reduce debit card fraud.

Most American adults carry a mobile phone and cannot remember how they managed without one. It only makes sense that the popularity of mobile banking is on the rise. Much of 2014 was devoted to the development of the Piscataqua Savings Bank custom mobile app. Customers have downloaded the apps on over 600 IPhone, Tablet and Android devices. These customers have 24/7 access to account information as well as the ability to transfer funds and pay bills. You can even deposit a check using the app with your phone’s camera. With mobile banking, our slogan “You Go, We Go With You” sums it up.

By way of comparison, in 2004 there was an average of 1,850 log-ins by 208 customers per month to online banking. The average number of log-ins in 2014 was over 9,200 by 1,000 customers, representing a nearly 400% increase over the 10 year period. The security and encryption technology used in online banking makes it very safe. Meanwhile, online bill pay also continues to gain popularity. Surveys conducted by the Federal Reserve Bank of Boston indicate that 62% of bills were paid by check in 2002 and today that is down to 10%. Online bill pay is fast and easy and can help protect against identity theft. Less paper means less chance your information gets into the wrong hands since electronic payments do not contain any of your personal account information. Monitoring accounts online for unauthorized transactions helps to further protect against fraudulent transactions.

All of these electronic banking options are offered in addition to our traditional banking services. We strive to offer choices that best serve individual customers’ needs. We value customer service and recognize the importance of having experienced and knowledgeable staff in the Bank. To further strengthen our customer service, we have created a new position to support the Deposit Operations Department. Our new eServices Specialist will be there to help with questions regarding the eServices suite of products.

Trust/Investment Department Report

Kathleen N. Donovan, Vice President/Trust Officer

Welcome to our Department’s 20th year as part of the PSB family! In 1995, a bold team of supporters within the Bank and in the community embarked on the huge undertaking of applying to the State of New Hampshire for trust powers and renovating space for a new department to provide trust and investment services. Imagine how many meetings must have occurred to bring this idea to fruition – we thank those who were instrumental, many of whom are still part of the PSB family today.

This is a perfect time to take a step back to evaluate where we have been, where we hope to go and how we are doing on this journey. The table below shows how the assets under management have grown through the years. (This reflects a net result of new business, deceased clients, trust distributions or terminations and market appreciation/depreciation):

In 1995, a staff of five ended the year managing 93 accounts valued at $46 million. As of December 2014, our current team of nine is managing 380 accounts valued at over $250 million, and 2014 will be remembered as the year we surpassed the size of the Bank (a proud accomplishment for all!). The estate tax laws and exemptions have changed over these years as well. In 1995 the exemption was $600,000, whereas today it is at $5.43 million (indexed for inflation) with a much smaller percentage of the population being impacted.

We have completed a busy year of transition with the retirement of Dick Kaiser and MaryAnn James (the last of the original team from 1995) while I assumed a new role. Laura Prescott, Certified Trust & Financial Advisor, has embraced many of Dick’s clients as well as her own. John Fredette and his assistant, Corey Boucher, Chartered Financial Analysts, have enhanced the investment portfolios with strategic asset allocation and diversification while taking advantage of system upgrades and efficiencies. Gail Armsden, Joanne Ouimet, Heidi Byers, Macey Roberge and our latest addition, Sarah Briolat, complete our dedicated operations and trust administrative support team and are to be congratulated for their roles in making our systems work and our clients feel supported. It takes a village!

Technology has also changed the way business is conducted from a compliance and documentation perspective. Regulatory, legal and tax changes make it more complex each year and we appreciate our network of local attorneys, accountants and other team advisors. Continuing education and ongoing training are important components of this process in order to maintain certifications and to stay abreast of ever-changing rules and requirements. Sarah Briolat will be attending a week-long session in Charlotte this April to provide a solid foundation for her new role as Trust Operations Assistant. Web-based and off-site educational opportunities are supported to enhance knowledge, confidence and skills. Our ongoing Cannon Teleconference Luncheon Series presented by national attorneys provides a valuable resource and networking opportunity as we invite local advisors, while receiving continuing education credits for our specialties.

As part of this Annual Report, Treasurer Bryan provided two Trust charts which include information about our assets, fees, expenses and net income for 2014. In a year of transition and technology upgrades, we held on to a net positive of $138,857 out of $1.6 million gross income. Our profile demonstrates our thoughtful approach to the growth within the Department, maintaining a consistent number of accounts in relationship to our ability to provide services:

PROFILE:
380 accounts (170 relationships) 
12/31/14 market value: $250.67 million 
Average account size: $660,000 Types of accounts: 37% fiduciary / 56% investment / 7% custody

TRENDS, IDEAS AND EXPECTATIONS: First and foremost, we plan to continue our model of providing personalized services with each client’s best interests in mind. The lack of a sales culture allows us to focus on clients while maintaining a highly competitive fee structure, still being mindful of our important contribution to the Bank’s bottom line.

Rollover IRA accounts are increasing rapidly as workers and retirees become solely responsible for their own retirement funds as pensions become a luxury few will receive. People are living longer and relying on their savings well into their nineties and even past 100 in many instances. Long-term care considerations are very real, often without close family members to help in a meaningful way. Avoiding guardianship and having trusted, bonded and regulated management of funds during periods of incapacity and beyond are critical factors for many. We all benefit from financial planning, creating budgets, setting goals and objectives, and coordinated tax planning. Understanding risk tolerance, liquidity needs and other factors are key considerations in setting the appropriate investment objective.

It is expected that the largest transfer of wealth in history will occur between the baby boomer generation and their children. We have Gen X, Gen Y, iGen – a whole new lingo and set of personalities in our future clients, complicated by a wide spectrum of increasing special needs, autism, addiction, spendthrift and custody issues. The methods for communicating will change dramatically as we shift into new generations. We all have unique backgrounds and expertise and cannot generalize, but women often outlive men and create their own wealth and have great strengths in understanding their family’s needs, but may lack the background or comfort zone for managing investments. Our comprehensive services and team approach work well with families through the generations in helping to fill gaps as needed.

Generally speaking, the future is bright for a boutique Trust Department like ours. We have our niche and can work closely with families and focus on what we do well without the burden of high-pressure sales goals. The large institutions (and those banks that have become part of large institutions through mergers and acquisitions) have moved their services out of the area and their model is not resonating well with families. We appreciate our local presence, referrals from our local professionals and existing clients, and the complementary role we play within our PSB family.

Economic Perspective

John P. Fredette, CFA/Trust Investment Officer

After a terrible winter, the remainder of the year was relatively robust as the majority of domestic economic indicators grew in stride. The S&P 500 Index returned 13.7% for 2014, while the Barclays Aggregate Bond Index gained 5.97%. To the surprise of many investors, long bond yields defied all expectations of a parabolic increase and instead declined on a global basis. Outside of the U.S., equity markets were less favorable as the MSCI ACWI ex U.S. (a non-U.S. stock index) ended down 3.87% for the year. In the latter half of the year consumers received an early Christmas gift, low oil and gas prices. While this will impact capital expenditure budgets and revenues for select firms, the positive impacts of a decline in such an important natural resource far outweigh any negatives. The fact that the consumer may end up saving more of this windfall is even more constructive for our projected imbalances.

This savings trend may be one that is here for the long-term as the baby boomers realize there is less income available and the Millennials finally understand social security and other safety nets are a Ponzi scheme, pardon my Italian.

Shifting to fixed income and trading my glasses for a magnifying glass will hopefully provide a more prescient estimate of short rates. My estimate last year of rising short-term interest rates in early 2015 may be slightly delayed to the latter half of this year at the earliest. The supply/demand imbalance present in the bond market is truly extraordinary. The long end of the curve is held captive by non-price sensitive entities such as: pension funds, insurance companies, sovereign wealth funds and central banks. Also, the Federal Reserve will likely be forced to sit on its hands a little longer given the tightening effects of a strong dollar and lower than estimated inflation. These dynamics may hold the long end of the curve down when short rates eventually rise. Ultimately, rising interest costs along with wages will have a negative effect on balance sheets. While this risk is pushed out a bit further, I will reiterate my statement from last year, “while corporate and household balance sheets are stronger, the next deleveraging cycle may be one of government deleveraging.”

While 2014 ended favorable for U.S. growth and corporate profits, the tide may be turning as we encounter some headwinds and a tightening cycle. Indicators outside the U.S. are currently more encouraging and help solidify the case for global diversification. Monetary policy is likely to become more fragmented over the years, which could result in destabilizing shifts in capital flows and currencies.

To summarize, it is important to recognize where we are in the economic cycle. Given the current and expected data, we estimate the U.S. is transitioning to the late stage. Investors should understand the reward/risk available at this stage, which is not as large as what is available near the bookends of the cycle and adjust their investment profiles accordingly.

ANNUAL REPORT 2013

what's new

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.

Respectfully,

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.

    ANNUAL REPORT 2012

    what's new

    President’s Message

    As you will see from the enclosed financial statements and the senior officer summaries, the Bank had another successful year in 2012. It will go down as a year of considerable change, from a switch at the helm and introducing new products to meet customer demands, to preparing the Bank to weather the impending regulatory storm.

    Our focus has and will continue to be on providing the best banking experience for our customers. Customers appreciate being able to speak to staff who are knowledgeable and accessible. They enjoy local and quick decisions that come from being in one office. This business practice will continue to be important going forward even as customer banking preferences change. Just four years ago the preferred banking method for customers was to conduct business in the office or branch (30%), according to an American Bankers Association survey. In 2012 the preferred banking method was internet banking at 39% with branches declining to 18%. This shift was even more pronounced in the 18 to 34 year olds surveyed with 45% preferring internet banking, 15% preferring mobile banking and those preferring branches representing only 11%. With a number of internet services already implemented during the past year our staff will be working to introduce mobile banking and researching a service called remote deposit capture that allows customers to deposit checks using their cellular phone. The challenge will be to introduce new products with an emphasis on bridging technology with great customer service.

    One of the keys to providing great customer service is making sure we have exceptional employees. Over the next one to five years there will be a number of key employees who will be retiring creating the need for succession planning throughout the organization. Management has already taken steps to support key areas of the Bank, such as Information Technology, Finance, and Trust. Succession planning will continue to be developed in 2013 and beyond to assure smooth transitions.

    There are many challenges in the banking industry, but none greater than the regulatory burden presented by the Dodd-Frank Act. Although enacted in 2010 many of the regulations that are being implemented have not yet come to fruition. This Act is larger than any other Acts previously imposed on the banking industry. It has 848 pages of regulation for 398 rulemaking requirements with an estimated 30,000 pages of final rulemaking documentation. This is a staggering amount of regulation especially for an institution with 40 employees. To give you a reference point, when the Gramm-Leach-Bliley Act was passed in 1999 it consisted of 145 pages of regulation and the Sarbanes-Oxley Act of 2002 consisted of only 66 pages of regulation. In preparation for a meeting with the New Hampshire delegates in Washington, DC during the American Bankers Association Government Relations Summit in April, I asked staff to prepare an estimate of the cost of regulation compliance for 2012. This estimate consists of actual hard costs for compliance support, training and man-hours needed to implement and monitor regulations. The total cost of compliance for 2012 was estimated at $638,000. Also, a total of 14,971 man-hours were devoted to regulation compliance which represented 7.2 full-time equivalent employees out of a total 36.55 full-time equivalent employees. Management is planning to allocate even more resources in 2013 as more final rules of Dodd-Frank Act need to be implemented. Although the cost of compliance is high, it would cost the Bank even more in increased regulatory oversight and possible fines for non-compliance.

    With the ever spiraling cost of compliance it will be increasingly important to find ways to reduce or stabilize operational costs of the Bank. Cost control measures will be explored through increased use of technology, improved delivery of services and controlling overhead. During 2012, the Benefits and Compensation Committee and management conducted a seven month retirement plan design review. Through that process the Board approved changes to the retirement plan that will reduce benefit cost volatility, making benefit costs more predictable in the future.

    For those of you who have not yet seen the video that describes what makes Piscataqua Savings Bank “Different”, I encourage you to go to our website, piscataqua.com, to see how history and mutuality make the Bank unique.

    Respectfully,

    Rick Wallis

    Richard M. Wallis, Executive Vice President

    Financial Results

    David H. Bryan, Treasurer/Financial Officer

    The year ending 2012 was another strong year with respect to the Bank’s financial performance. Modest growth on the Balance Sheet was realized with the Bank’s community deposit base holding firm. Low interest rates have forced some consumers in need of more income to redeem maturing certificates of deposit and seek higher returns in the financial markets and/or through specials at other institutions. However, many folks are also simply parking money waiting for rates to rise. Consequently, deposit composition has shifted being more heavily weighted in transaction and savings accounts. Finding solid returns without taking undue credit risk or extending too far with maturity has been no easier for management at the Bank. A large cash position maintained with correspondents at the beginning of the year was redeployed into Investments. The Bank took on a more substantial position in high quality municipal and corporate bonds. Portfolio lending at the Bank is accomplished through adjustable-rate products. It has been very difficult to maintain loan volume on the Balance Sheet with the consumer generally looking to purchase or refinance with a fixed-rate product. The current environment provides a serious challenge in managing the asset/liability mix that can support a strong enough margin while being prudent. Dynamic simulation relative to the Bank’s Balance Sheet in varying interest rate scenarios can help, and modeling software is being employed to manage the risk and return potential.

    Notwithstanding very low yields on earning assets and a shrinking Net Interest Margin, Earnings from operations came in quite solid for 2012-only $46 thousand less than what was generated the year prior. An overall Return on Assets of .54% was a noteworthy accomplishment given interest rates, competition, and an increasing regulatory burden. Non-interest income in the form of fees for services has become a more critical component in the generation of revenue. The Bank is fortunate to be in a good strategic position in the local area with regard to a well-established Trust Department.

    Relationship banking is better cultivated with the services the Trust Department offers, and the fiduciary fee revenue generated strongly augments the Bank’s bottom line. It was mentioned above that maintaining balances for the Bank’s loan portfolio has been a struggle; however, the Loan Department originates and services fixed-rate mortgage products that are sold to a correspondent. The Loan Department was extremely busy this past year in generating fee income associated with this service. Fee income associated with trust and loan services offset some higher operating expenses that resulted from the Bank celebrating its 135th anniversary.

    Control of overhead has always been a hallmark in managing operations. Efficiency is monitored closely. It is the measure by which we can quantify the percentage of a dollar needed to support the generation of that dollar. In our case, it is taking approximately 78 cents in operating expenses to realize a dollar in revenue (refer to Net Income chart). This number increased during the Bank’s anniversary year. 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 controlled growth has enabled the Bank to maintain a Capital ratio in excess of 16%. 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 being a vibrant and productive force in the community. 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 Results
    Debra S. Perry, Vice President/Senior Loan Officer

    We recently had an email from a current customer who wrote: “I know things have changed and why, so I’m not objecting to scrutiny about my employment and credit rating. But I can’t help but remember when my dad was buying a house in New Castle in 1970; an acquaintance of his took him to visit Bob McLaughlin who was mowing his lawn. Bob said OK and told dad to go to the Bank and fill out the paperwork. A different era.” How true that statement is!

    We have never strayed from our prudent underwriting standards and the attention that we give to our customers despite mandated regulatory changes throughout the years. Unfortunately, since the housing market meltdown in 2007, laws and regulations have continually changed and underwriting guidelines have tightened even further. This means we are required to collect and verify even more supporting documentation from our borrowers than ever before. We are bracing for more changes as two new lending regulations will be taking effect this year along with three other proposed rules that could take effect by the end of the year. Additionally, there are seven more proposed lending rules for 2014. Compliance has become a high priority consuming many hours of our time. In order to remain compliant and stay on top of the regulatory changes, the Loan Department purchased and installed a new Loan Origination System. This new web- based system constantly monitors and updates any new regulatory changes. This ensures us that all loan origination documents provided to our borrowers are up to date and compliant.

    Although compliance is a high priority, our top priority in the Loan Department is originating loans. In 2012 the Loan Department originated $61.4 million in new mortgage loans, an increase from 2011 when we originated $56.2 million. Rates continued to remain historically low resulting in more refinance and new home purchase activity. Once again, this small department of seven showed their remarkable capability of originating and processing a huge volume of loans. Of the $61.4 million, $49.3 million were portfolio mortgage loans and $12.1 million were fixed rate mortgage loans. Despite the new portfolio originations of $49.3 million, the portfolio ended the year down by $7.2 million. This was a direct result of borrowers seeking low fixed rate mortgages which do not remain on our books.

    Piscataqua Saving Bank’s loan volume compared favorably to that of other lenders. According to Real Data Corporation, Piscataqua Savings Bank was the eighth 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 2.4% share of the market which was slightly below 2011 when the Bank’s market share was 2.56%.

    The purchase activity in the local real estate market has increased. According to Northern New England Real Estate Network, Rockingham County experienced higher residential real estate sales with 4,571 sales in 2012 up from 3,771 in 2011, or a 21% increase. In addition to the higher sales volume the median sales price of a residential home increased from $225,000 in 2011 to $230,000 in 2012. These are all good signs of a modest improvement in the economy.

    Other signs of a modest improvement in the economy include the decline in the number of foreclosure deeds and delinquency rates. The number of foreclosures throughout the state decreased in 2012 by 5% from 2011 and 7% below the total for 2010 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) declined from 10.34% in 2011 to 10.07% in 2012. Piscataqua Savings Bank’s delinquency rate also declined from 1.13% to 1.05% during the same time period. This continued low delinquency rate is a reflection of sound underwriting practices that the Bank has maintained during both good times and bad. Borrowers have come to value and appreciate the experience and advice that our Loan Department staff provides.

    Deposit Operations and Compliance Results

    Joan W. Gile, Executive Vice President/Operations

    The last line of the Piscataqua Savings Bank value statement reads “We are Different.” That difference is what makes banking at Piscataqua Savings Bank a valuable experience. When you call during banking hours you do not end up in an endless maze of menu options. You do not have to fit your reason for calling into a cookie cutter list of options. You will speak to a person who will help you. When you come into the Bank, you are greeted by a staff member who has been with the Bank for many years and most likely will know your name. The average tenure for the Customer Service, Deposit Operations and Teller Departments is over 12 years. They are friendly, knowledgeable and eager to help. The employees’ commitment to Piscataqua Savings Bank and its customers is one example of how “We are Different.”

    Today’s economic and political environment creates a significant set of challenges for community banks like Piscataqua Savings. Staying abreast of and implementing the required regulatory changes into our daily procedures is very challenging. This year we implemented a major release to our core banking, teller, and online banking systems. These upgrades were not only necessary to meet regulatory requirements but also to enable us to continue to deliver high quality banking products and services to our customers.

    Our online banking bill payment system was upgraded with a new Person to Person payment system. This system, called Popmoney®, allows you to pay another individual electronically, regardless of where they bank. An email or text message is sent with a code and a message that you have sent them money. They can then have the money sent electronically to their account at any bank. Person to Person payments are very popular in European countries and are becoming more popular in the U.S.

    Last year we began offering eStatements to our online banking customers for their checking and savings statements. We have over 900 statements being delivered electronically, saving paper, postage and time. Eventually, we will be able to send all statements and notices electronically.

    In an effort to offer products and services that will meet the changes in the preferred banking methods of our customers, we began offering the eAccess Account. This account is geared toward the customer who prefers to bank all electronically using a debit card, online banking and online bill pay. There are no monthly maintenance fees as long as there are no checks written. Foreign ATM fees can be totally avoided by using SUM® ATM machines or getting cash back with Point of Sale purchases.

    With the changes in the payments industry and increase in number of electronic banking solutions comes an increase in the need for safe and secure delivery. Piscataqua is committed to the security of our customers’ information and you can be assured we have taken all precautions to meet or exceed regulatory and industry standards before offering a new product and service.

    Traditional and innovative banking products and services delivered by attentive, experienced and dedicated staff is how banking at Piscataqua Savings Bank is “Different.”

    Trust/Investment Management Results

    Richard G. Kaiser, Vice President/Senior Trust Officer

    The Trust and Investment Department had a successful year and as of December 31, 2012 reached an all-time high with respect to assets under management of $201.52 million. This was due in part to strong new business development and the global bull market that continued throughout 2012. To the surprise of many investors, 2012 was a year in which risk taking was rewarded, the more risk taken the bigger the reward. Global Central Banks have actively promoted risk taking by suppressing interest rates over the last several years, in effect transferring wealth from savers to borrowers – in an attempt to boost housing, equities and eventually economic growth. The Federal Reserve (the Fed) maintained a very accommodative stance as its easy monetary policy continued to keep interest rates at “rock bottom lows” with Operation Twist being extended along with launching Quantitative Easing III and IV (QE3 & QE4). Markets exhibited less volatility than in previous years and while there was heightened investor concern, from time to time during the year, about slowing global growth (specifically in China), European sovereign debt crisis, geopolitical concerns in the Middle East and North Korea and Congress’ continued inability to resolve the “fiscal cliff” and debt ceiling issues, the bull market continued in its third year. Investors’ hopes were buoyed by positive economic data most notably with the housing market strengthening (new home sales rising by double-digits year-over-year and the median price of new homes shooting up 23% from April 2010 lows) as well as increased industrial production, durable goods orders, auto sales and decreasing unemployment (8.7% down to 7.8%). Domestic and international markets posted positive returns and investors continued to embrace a “risk on” posture to garner higher returns in a very low interest rate environment. U.S. stock markets managed to post respectable returns in 2012 although they lagged their foreign and emerging counterparts for the year. Domestically, the Dow Jones Industrial Average (DJIA), which represents the largest of the blue chips, returned 10.2% for the year vs. the S & P 500 Index gaining 16% and the Russell 2000, made up of small capitalized companies, returned 16.35% with the NASDAQ composite returning 17.5%. Internationally, foreign stocks outperformed U.S. stocks with the MSCI EAFE Index, which measures performance for Europe and Asia, returning 17.32% followed by the MSCI Emerging Markets ND Index for markets such as Brazil, Russia, India and China (BRIC) at 18.22%. In the fixed income markets higher risk bonds and those with longer maturities outperformed long term U.S. Treasury Bonds. For the year, high yield “junk” bonds yielded 15.81% and longer term corporate bonds returned 12.73% with U.S. Treasuries returning only 2% for the year.

    Both the stock and bond markets positive performance for the year, in concert with the strong net new business development, propelled the Trust Department’s total market value for assets under management to a new high of $201.52 million, an increase of $12.85 million or 6.81% from the beginning of the year. Of this increase, market value appreciation attributed $4.65 million or 36% and net new business development of $8.20 million or 64% comprised the balance. This year, as in the previous two years, our New Business effort focused on increasing the amount of assets under management while reducing the number of actively managed accounts. At year-end, the total number of Trust Department managed accounts was 372, down from 374 a year ago with the average account size increasing to $541,700 from $504,500. Total new business development in 2012 reverted back to trend line with $18.9 million developed vs. $32.4 million in the previous year (the second strongest year since the development of the Department). Net new business after distributions and terminating accounts was $8.2 million compared with $21.9 last year and $9 million for 2010. We continue to see good new business growth as a result of our excellent referral program which comes from existing clients, Bank Trustees and Corporators, Bank Officers and staff as well as other referrals from local professionals, i.e. attorneys, CPAs, CLUs and financial planners. During this past year several large bank wealth management firms in the Seacoast area changed their Trust/Investment/Administrative models which resulted in high employee turnover and client dissatisfaction. Some of their clients are now with us. In 2013 the Bank will be heavily promoting the Trust Department and advertising our fiduciary and investment management services through local newspapers, billboards, various senior magazine publications and a “Money Minute” on a local radio program.

    The composition of the Department’s accounts continues to be consistent with 2011 with personal trusts and estates comprising 39% of our account base, IRA’s at 15%, investment management accounts for individuals and charitable organizations at 42% and custodial relationships at 4%.

    The increase in the Trust Department’s assets under management positively impacted revenue for the year. Total trust revenue received was $1.457 million, $107.8 thousand or 8% over 2011. Trust Department expenses increased by $115.1 thousand to $1.215 million, a 10. 4% increase over last year due in part to increased overhead expenses associated with the renovated second floor and new third floor Trust Department office space and expenses related to adding a new Trust Investment Officer to our staff. Net profit for the department before taxes was $241.8 versus $249.1 thousand in 2011 and net after profit taxes for 2012 was $140.8 thousand, down from 2011 by $19,003.

    Since 2006, the State of New Hampshire has passed landmark trust legislation with additional trust related bills enacted in 2008 through 2012 which has made New Hampshire one of the most progressive states with respect to its trust laws and one of the best states in which to conduct trust business. At the end of July 2012, New Hampshire enacted SB Bill 326 which completely eliminated the application of the 5% Interest & Dividends tax (the I & D Tax) to “non-grantor” trusts. (A non-grantor trust is an irrevocable trust that is treated as a taxpayer separate from its grantor for federal and New Hampshire tax purposes). New Hampshire does not tax capital gains within trusts, and has historically only taxed interest and dividends on trusts with New Hampshire resident beneficiaries, and then only on that portion of the trust’s interest and dividend income attributable to that resident beneficiary. Beginning in 2013, regardless of the residence of the beneficiaries, non-grantor trusts will not be subject to any New Hampshire taxes. Instead, New Hampshire resident beneficiaries of these trusts will pay I & D taxes only on the taxable interest and dividends actually distributed to them. Non-resident beneficiaries of New Hampshire trusts will pay no New Hampshire I & D tax on distributions they receive from these trusts.

    The passage of this bill is important as it continues to posture New Hampshire as a one of the premier states for establishing and administering trusts. This should provide new opportunities for us to grow and work closely with new clients in developing, managing and administering their trusts and estate plans.

    Also, on January 1, 2013 federal tax law was changed as Congress passed the American Tax Payer Relief Act for 2012. The passage of this act prevented the automatic sun-setting of Bush-era tax cuts for many individuals while allowing taxes to rise for those with higher incomes. One of the key changes was in the exemption for estate and gift taxes. Every individual is entitled to a unified credit that offsets gift and estate tax on a certain amount of lifetime gifts and transfers at death. A $5.12 million exemption was allowed for 2012 and the exemption will stay at $5 million adjusted annually for inflation. In 2013 the inflation adjusted amount will be approximately $5.25 million per person. Additionally, the annual gift tax exclusion has been increased to $14,000. Anyone can make annual gifts of up to $14,000 per recipient and can make as many gifts as they want without triggering any gift tax or using their unified credit. Married couples can give $28,000 per recipient.

    During 2013, Kathleen N. Donovan, CTFA (Certified Trust & Financial Advisor) will be working to obtain the Accredited Estate Planner (AEP) designation. An AEP designee provides quality, professional advice and meets the highest standards of knowledge, skill, ethical conduct and experience in estate planning. The AEP designation is the only graduate level multi-disciplinary accreditation that focuses specifically on estate planning. It emphasizes the disciplines of law, accounting, insurance, financial planning and trust services.

    Lastly, I am very pleased to announce that in early January 2013, John P. Fredette, CFA (Chartered Financial Analyst) joined the Trust Department as a Trust Investment Officer and will be managing new and existing trust client investment portfolios. Prior to joining us, John was an Assistant Portfolio Manager in the Global Asset Division at Fidelity Investments. When you are in the Bank please come up and introduce yourself to John; he will be pleased to meet you.

    ANNUAL REPORT 2011

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    A look back…

    Twelve years ago, as the newly appointed President of Piscataqua Savings Bank, I remarked in the Bank’s January 2000 newsletter that it was my privilege to have been given the opportunity to lead this special institution which has been such an important part of the Portsmouth community since 1877.

    Although the challenges that would be ahead were unknown, I knew how important it would be to do the best that I could to continue the Bank’s well-established commitment to our customers, staff, and our community…it’s what we have often called the “Piscataqua Difference.”

    I am now in my 40th year with Piscataqua Savings Bank. I have been very fortunate to work with such a dedicated group of exceptionally capable officers, staff, and trustees that are equally passionate about the Bank and the difference we make to our customers. Knowing the depth of our team’s abilities and commitment to the Bank has allowed me to coordinate my plans for retirement.

    The Board and senior management have worked continuously to ensure a succession plan which will uphold the Bank’s values of putting our customers and the community first. Our tradition of promoting from within is a strong component of making the “difference.” I know our customers and employees, as well as community leaders are pleased to learn that our transition plans are founded on leaders who embrace the culture, mission, and values which have been such an integral part of this Bank’s long history and success.

    It has been an honor and with pride that I have served the Bank. With enthusiasm and confidence, I congratulate Rick Wallis on his forthcoming appointment as President/CEO and extend a hearty thank you and well wishes to him, the rest of the Bank’s leadership team and the entire staff.

    “New Leadership. Same Commitment”

    Jay S. Gibson, President/CEO



    Jay S. Gibson
    President/CEO

    A look ahead…

    Early in 2011 the Board and Management completed a five year strategic plan to answer the question, “Is our current business model sustainable over the next 3 to 5 years?” What we discovered is that the business model of being a single office, independent mutual savings bank is viable. Our current corporate structure allows staff to focus on service to our customers and commitment to the community.

    Although the model will remain the same, the Bank will need to adapt to changes in customer needs, regulations, and the economy. Over the next 3 to 5 years we have plans to roll out financial products that will enhance the customer experience. We will need to work diligently to adopt the regulatory changes imposed by the Dodd-Frank Act and the creation of the Consumer Financial Protection Bureau. Also, we will continue to be challenged by historically low interest rates and a troubled economy.

    To carry out the Bank’s mission, we need an experienced team of management and staff. In 2011, David Bryan joined the team as Treasurer and Financial Officer. David brings years of experience as a banker and regulator to this key senior management position and, more importantly, he shares the Bank’s values.

    The rest of the team is in place and is a driving force behind the Bank’s success. Many of our staff members have a long tenure with the Bank, some with over 25 years of experience. This employee longevity is a benefit to our customers, providing greater product knowledge and enhanced customer relations.

    Although Jay is stepping down as President/CEO, his impact on the organization will remain for years to come. Jay has been a mentor and friend to everyone who has worked alongside him over the past 40 years. Thanks to his leadership the Bank is on solid footings; an institution that is financially strong and a corner stone of the Portsmouth community. The staff and I wish Jay and Mary Pat well as they begin a new chapter in their lives; and thank both for their devotion to and stewardship of Piscataqua Savings Bank.

    Rick Wallis

    Richard M. Wallis, Executive Vice President

    Financial Results

    David H. Bryan, Treasurer/Financial Officer

    The year ending 2011 resulted in strong performance for the Bank with respect to balance sheet development and operating results. Growth of over 2.5% was centered in core deposits, as more people sought out a community bank in light of displeasure with regional banks. The growth is also a tribute to our reputation within the community that has evolved through 135 years of commitment to organizations close to home and exceptional personal service to local citizenry. Despite rhetoric that bank’s are not lending, portfolio balances at Piscataqua Savings remained level during a year when demand for credit was off and an abundance of consumers were focused on paying off debt. An extremely productive year in loan origination was necessary to off-set customer appetite to consolidate, reduce and/or eliminate their debt. A difficult investment environment and little opportunity for higher yields without taking undue risk brought a transfer of assets from securities into liquid cash balances the Bank maintains at correspondent banks. With these balances up $15 million from the end of 2010 as a result of deposit growth and maturing securities, the Bank stands ready to increase investment balances with improving economic conditions.

    A protracted period of record low interest rates has put pressure on the Bank’s margin- or the difference in interest received on earning assets vs. interest paid on deposits. Net Income was down a modest $87 thousand relative to 2010. Offsetting this margin pressure has been the strong performance of the Bank’s Trust Department. The existence of the Trust Department augments a diverse array of services offered to our customers and enables the Bank to operate more efficiently. The Bank was able to garner a .57% Return on Assets which was generally better than the earnings performance of comparable financial institutions. Efficiency is monitored closely by management. It is the measure by which we can quantify the percentage of a dollar needed to support the generation of that dollar. In our case, it is taking approximately 75 cents in operating expenses to realize a dollar in revenue (refer to Net Income chart). Through capitalizing on the multitude of 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 controlled growth has enabled the Bank to maintain a Capital ratio in excess of 16%. 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 being a vibrant and productive force in the community. As you continue reading on in this Annual Report, please take note of the positive trends depicted in the financial charts relative to growth, net income/efficiency, asset quality, and capital.

    Lending Results

    Debra S. Perry, Vice President/Loan Officer

    2011 was a transition year for the loan department. Rick Wallis, our Senior Loan Officer, was departing from his everyday duties in the department in order to work closely with Jay in preparation for his transition to his new position. I was fortunate enough, with Rick’s guidance, to take over the everyday operations of the department. In addition, it was determined that we needed to hire an additional loan officer. Denise Magnant, who has been with the bank and in the loan department for 35 years, has done a tremendous job of filling this position along with her many other duties. As the fourth quarter approached, it became apparent that we also needed to add an additional support person. We were fortunate to be able to hire from within again and Laura Griswold, who came from the teller line, has joined us.

    The loan department consists of a team of four loan officers and three support staff. This outstanding small team originated $56 million of mortgage loans in 2011 and $7 million in home equity lines of credit. None of this could have been accomplished without the support and tremendous hard work of everyone in the department.

    Our Values Statement ends with the words “WE ARE DIFFERENT” and this is obvious in so many ways in the loan department. We offer loan products that enable us to provide financing to customers that were turned down by other lending institutions because they didn’t meet their underwriting guidelines. Our portfolio loan programs are a great alternative for these borrowers. Because we keep our portfolio loans in house, we can underwrite the loans without having to meet investor guidelines. In addition, we offer a modification program for those customers who have a portfolio loan. For a nominal fee, the customer can modify their existing mortgage from a higher rate down to a lower rate without having to refinance. This program has been offered to our customers since 1998 and, during low interest rate environments, like we are in now, has enabled the bank to retain mortgage customers.

    Another way that separates us from the rest is our fixed rate loan product. Although we sell our fixed rate products to an investor, one of the programs we offer is not subject to loan level pricing adjustments or “add-on fees” that can make the closing costs extremely expensive for the borrower. We are able to give our customer a competitive fixed rate with closing costs that are much lower than our competitors. In addition, we service the loan so they are able to come in with questions or call and talk to a real person.

    We are in one of the lowest rate environments in history and yet the word on the street is “banks aren’t lending”. The financial crisis of 2008 brought a landslide of changes to our industry and many lending institutions including mortgage companies were forced to make some underwriting changes. Gone are the days when a borrower could buy a home with no money down and no job. Market values have declined and a lot of borrowers are finding themselves owing more than their home is worth. Thus, some borrowers are finding it very difficult to buy a home or refinance an existing home so the perception is banks aren’t lending. Piscataqua is lending. Our prudent underwriting guidelines have not changed and we find more and more borrowers coming to us to get away from the “big banks”.

    The way we deal with our customers is different. We know them well; many of them on a first name basis. We treat them with respect and constantly strive to meet their needs while giving them exceptional service. When a customer runs into hard times and they aren’t able to make their payments, we work with them whenever possible. This effort and the relationships that we have with our customers, helps us to keep our delinquencies at a very low level. Our delinquency ratio at the end of 2011 was 1.13% of total loans, down from last year’s 1.42%. This ratio, in comparison to the national delinquency ratio of 10.20%, is very favorable.

    Piscataqua Saving Bank’s loan volume compared favorably to that of other lenders. According to Real Data Corporation, Piscataqua Savings Bank was the ninth highest mortgage volume lender (out of approx. 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 2.56% share of the market which was slightly below 2010 when the Bank’s market share was 3.2%.

    To sum it up, a new customer recently sent back a questionnaire survey that we had sent. When asked what they liked or didn’t like about our loan application and approval process, their response was “After dealing with a number of large financial institutions, there was nothing to dislike!”

    Deposit Operations and Compliance Results

    Joan W. Gile, Senior Vice President/Operations

    In a recent Seacoast Online posting a customer stated that they would take out of town visitors to Piscataqua Savings Bank to show off that there were no plastic shields and bars in front of the living and breathing people. ÒIt was so friendly.Ó Our customers regularly express with enthusiasm their appreciation for the efforts the staff makes to personally assist them. Our Value Statement states ÒWe are DifferentÓ and we truly are. We have someone personally answer every call that comes into the Bank during the day. We have senior officers that sit in the lobby and are approachable and available to everyone. Our employees are dedicated to providing service to our customers that exceed expectations. The Bank continues to attract new customers as people are increasingly more aware of the benefits of doing business with locally owned and operated organizations. We welcomed over 400 new customers to Piscataqua Savings Bank during the year.

    Online banking customers have enjoyed the new and improved bill payment product that we implemented late in 2010. This year we streamlined the online banking activation process. A new customer can now get online in as little as 10 minutes where they used to have to wait up to one week to get a user name and password. There were almost 300 new customers added to online banking during 2011. We now have over 1500 customers who are using the online banking feature and over 300 are paying their bills online.

    Finding ways to keep costs low is very important during these difficult economic times. In an effort to reduce expenses for our customers, we established a new relationship for our check printing services. Main Street Checks is a check printing company that specializes in working with community banks. They hold many of the same values as Piscataqua Savings and offer a high level personal service. Their products are high in quality and low in price. Our customers are seeing some significant savings when purchasing printed checks and check products.

    Piscataqua Savings Bank continues to support employees’ career development and 2011 was a busy year. Last summer we hired two college interns which provided an opportunity for one teller to gain some experience in another area of the Bank. Macey Roberge spent the summer in the Trust Department learning Trust Operations and Administration. By the end of the summer, Macey had demonstrated her strengths and a desire to excel in this area. The Trust Department determined that this should grow into a full-time position and she began working in the department full time in August.

    Late in the year the Loan Department developed a new position to fulfill staffing needs. Laura Griswold, another teller who has demonstrated a desire to learn more about banking, was moved to the department early in 2012. Laura has been with Piscataqua Savings Bank since September 2008 and is another example of our commitment to developing staff and promoting from within.

    Trust/Investment Management Results

    Richard G. Kaiser, Vice President/Senior Trust Officer

    2011 was an exceptionally good year for the Trust Department as the size of the Department’s assets under management reached a record level of $188.7 million. New business development of $32.4 million was the highest since the creation of the Department in 1995. This was achieved in spite of the difficult and volatile year in the stock and bond markets where investors continue to worry about slowing global growth, weak economic recovery in the U.S. and a lack of resolution to the European sovereign debt crisis. 2011, like 2010, saw positive but lower returns in the continuing and ongoing risk on/risk off investment environment. For the S&P 500, 2011 turned out to be something of a Òmuch ado about nothingÓ year. The index began the year at 1,257.64 and ended up the year at 1,256.60 with its dividend of 2.11% being its total return. Large market swings were common as two of every five trading days saw a 100 point drop or rise in the markets. The Dow Jones Industrial Average, on the other hand, fared better than the S&P 500 returning 8.36% for the year and the NASDAQ fell .8%. International markets fared poorly during the year as investors avoided foreign equities because of the continuing European debt crisis problems. The MSCI-EAFE Index, a barometer for the market performance for Europe and Asia, posted a loss of almost 12% and the MSCI Emerging Markets Index for markets such as Brazil, Russia, India and China (BRIC) was off 18% for the year. During the year fixed income (bonds) posted the best returns as investors who stuck with long-term U.S. Treasury Bonds (20 to 30 years) received the

    biggest gains of 29.1% for the year. Over the past two years U.S. Treasuries had average annual gains of greater than 19%.

    The growth in the Trust Department’s market value came predominately as a result of extremely strong new business development and not market performance. As of 12/31/2011, the Trust Department’s market value catapulted to a new year-end high of $188.7 million; a $21.9 million or 13.15% increase over the end of 2010. As in 2010, we continued to concentrate on increasing the amount of assets under management while at the same time reducing the number of actively managed accounts. At the end of the year, the Department managed 374 accounts, down from 377 accounts a year ago, with the average account size increasing to $504.5 thousand from $442.1 thousand. During 2011, $32.4 million of new business was developed, $12.8 million greater than in 2010. Net new business after distributions and termination was $21.9 million compared with $9 million last year. Robust new business growth continued as a result of our excellent referral program which comes from existing clients, Bank Trustees and Corporators, Bank Officers and staff, as well as qualified referrals received from local professionals, i.e. attorneys, CPA’s, CLU’s and financial planners. As in the past, new clients and existing clients continued to consolidate their affairs with us as they want to have their assets managed locally and not worry about mergers, acquisitions or consolidations of their current provider. The account relationships developed during the past year remained consistent with the previous years as personal trusts and estates comprised 39% of our account base, rollover IRA’s 7%, investment management accounts for individuals and charitable organizations at 43% and custodial relationships at 11%.

    Since the Trust Department’s fees are based on the market value of the accounts being managed, the increase in the Trust Department’s market value positively impacted our revenue for 2011. Total revenue received for the year was $1.349 million, $112,232 or 9.07% greater than last year. Trust expenses increased by $56,435 to $1.1 million, a 5.4% increase over 2010 with the resultant net profit after tax to the Bank of $159.8 thousand, $32,941 or 25.96% greater than 2010.

    During 2011, with many months of planning and construction, we finally completed the renovations to the Trust Department, moving the Trust Investment and Trust Operations areas to the new third floor offices along with renovating the Trust Administration offices on the second floor. This created two new offices which will allow us to expand our staff to meet the needs of our growing client base.

    As we look towards 2012, we look forward to continued strong growth in our Department as a result of our very successful referral network and our extensive outreach into the local community. 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. In September of 2011 Senate Bill 50 was passed which further enhanced New Hampshire’s flexible trust laws and provides new opportunities for us to work with New Hampshire residents and out-of-staters in developing their trust and estate plans.

    ANNUAL REPORT 2010

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    Piscataqua Savings Bank again remained in the forefront of Portsmouth’s banking community. During 2010 we developed many new customer relationships as a result of referrals by existing customers, an ongoing recognition of the Bank’s important role as a respected corporate citizen in the Portsmouth community, and continued dissatisfaction with large institutions. Our lending staff originated a volume of mortgages surpassed only by the year prior. We refinanced mortgages for many new customers and maintained a very strong market share for mortgaging home purchases in the Seacoast. Our trust department staff successfully established almost $20 million in new accounts achieving a new record for market value of $166.7 million.

    The Bank’s performance and accomplishments during 2010 were truly outstanding. I hope you will take the opportunity to read the following summaries by our Bank’s senior officers of the positive results we experienced in each of their respective areas.

    Financial Results

    Joan W. Gile, Senior Vice President/Operations

    Balance Sheet:

    In 2010, total assets increased by over $14.5 million when compared with year-end 2009. The loan portfolio increased by $760 thousand on a net basis, excluding the reserve for loan losses. Total deposits increased by $13.2 million from year-end 2009. The securities portfolio increased by $15.8 million and cash and cash equivalents decreased by $1.9 million from year-end 2009.

    Capital levels increased over 2009 year-end levels with the addition of 2010’s year-end earnings. The Bank’s capital ratio of 16.03% remains one of the strongest in the State of New Hampshire. As a mutual bank we do not have the same obligation as a stock-owned bank to provide a return to stockholders; but rather, we can utilize this strong capital position to support our business model of remaining a very personal bank gearing our services exclusively to local individuals and families.

    Earnings:

    Interest income in 2010 was slightly lower than 2009 by $575 thousand. Net Interest Income surpassed 2009’s level by $91 thousand. The Bank was able to accomplish this, as interest expense decreased by $667 thousand.

    Non-interest income in 2010 was $351 thousand above 2009 year-end levels. This is mainly due to the Trust Department growing their assets managed and a significant increase in the number of fixed rate loans sold on the secondary market.

    Non-interest expense increased from $5.3 million in 2009 to $5.5 million in 2010. Salaries and employee benefits experienced a minimal increase from 2009 levels. The remainder of the increase was in occupancy and equipment expense.

    After-tax net profit increased from $1.09 million in 2009 to $1.37 million in 2010. The level of earnings continues to adequately support asset growth and maintain a strong capital position.

    Included in this report is a graph showing the trend of the Bank’s net income and its efficiency ratio. The efficiency ratio is the measurement of what it costs for each dollar the institution makes. The Bank’s ratio for 2010 was 72.72% meaning it costs the Bank $0.723 for each dollar of income that it makes. The ratio in 2009 was 75.21%. This metric is of key importance to the Bank and one from which the Bank benefits by having its single office location and having a relatively small staff.

    Lending Results

    Richard M. Wallis, Executive Vice President/Senior Loan Officer

    Mortgage loan activity was buoyed in 2010 by some improvement in the local real estate market. According to Northern New England Real Estate Network, Rockingham County experienced slightly higher residential real estate sales with 2,417 sales in 2010 up from 2,292 in 2009, or a 1.05% increase. In addition to the higher sales volume the median sales price of a residential home increased from $257,950 in 2009 to $266,900 in 2010. These slight improvements are indicative of a slowly recovering economy.

    Piscataqua Saving Bank’s loan volume compared favorably to that of other lenders. According to Real Data Corporation, Piscataqua Savings Bank was the fifth highest mortgage volume lender in the market area made up of eight surrounding communities (Greenland, Hampton, North Hampton, New Castle, Newington, Portsmouth, Rye and Stratham). This volume represented a 3.2% share of the market and was an improvement over 2009 when the Bank’s market share was 2.77%.

    Mortgage interest rates declined by .75% from April through October 2010 on 30 year fixed-rate mortgages. This sharp decline in rates created an opportunity for homeowners to refinance their mortgages and enabled our loan department to originate $77.6 million in mortgage loans, which was its second highest origination volume in history, 2009 being the first with $80.6 million. Despite this high volume of lending the net gain in the portfolio was only $760 thousand due to a high level of payoffs often experienced during a refinance market.

    Although there are signs of improvement in the real estate market, there continues to be a cloud hanging over the market which will impede a quick recovery. The number of foreclosures throughout the state increased in 2010 by 14% according to data provided by New Hampshire Housing Finance Authority. This increase was in spite of a moratorium on foreclosures by several larger national lenders during the last quarter of 2010. A bellwether for future foreclosure activity is the increased number of foreclosure auction notices (6.3%) posted during the final quarter of 2010. In 2010 Piscataqua Savings Bank conducted its first foreclosure in almost two decades; however, the Bank did not experience a loss.

    Nationally, the residential mortgage delinquency rate (those mortgages thirty days or more past due) for banks declined from 10.98% in 2009 to 10.57% in 2010. Piscataqua Savings Bank’s delinquency rate increased from 1.24% to 1.42% during the same time period. This continued low delinquency rate is a reflection of sound underwriting practices that the Bank has maintained during both good times and bad. Borrowers value and appreciate the experience and advice that our Loan Department staff provides.

    “Regulatory Environment”

    Debra S. Perry, Vice President/Loan Officer

    Since the 1930’s banks have had legislative and regulatory changes that impacted the way they do business. The financial crisis from 2008 to the present is considered by many economists to be the worst financial disaster since the Great Depression. Until this period, legislative and regulatory changes came in relatively manageable increments. Since 2007, there have been waves of regulatory changes that have significantly impacted the banking industry. The biggest of them all is the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted on July 21, 2010. The Act contains over 2,300 pages and represents the longest and most sweeping regulatory legislation ever adopted. Dodd-Frank is intended to reform mortgage lending and, in particular, protect consumers that can’t afford to borrow from predatory lenders. Most of the impact on the Bank will occur over the course of the next few years when what is estimated as hundreds of regulatory rules will be promulgated.

    The Act creates a new Consumer Financial Protection Bureau (CFPB) that will have supreme responsibility for establishing most of the consumer protection regulations in the future. The CFPB opens for business on July 21, 2011 and will be an independent agency with the power to assess civil money penalties for violations of federal consumer financial laws.

    While Dodd-Frank will affect many areas of our daily operations, its most significant impact will occur in the loan department. One major change is the required registration and fingerprinting of our Loan Officers with the new National Mortgage Licensing System Registry (NMLS), a requirement under the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act). This will provide each of our Loan Officers with a unique identifier number that is registered with the NMLS and will remain with that individual, regardless of changes in employment, and must be provided to consumers. Other changes (some proposed, some already in effect) include numerous changes to many of the required disclosure documents that we give to our borrowers, new appraisal rules, more collection of data from borrowers so that regulators can scrutinize our practices for potential Fair Lending violations, and the reclassification of our mortgage products. Collectively, these changes could very much limit the Bank’s variety of offerings for the consumer.

    We are vigilantly monitoring and evaluating all of the regulatory changes. Our staff has been attending numerous compliance association meetings, seminars and webinars on the changes as they are rolled out. The total cost and impact of these regulatory changes to the Bank is still unknown.

    Deposit Operations and Compliance Results

    Joan W. Gile, Senior Vice President/Operations

    The Bank continues to attract new customers as people are increasingly more aware of the benefits of doing business with locally owned and operated organizations. Our mission and values clearly state our commitment to the community and our mutual form of ownership enables us to make decisions in the best interest of the customers. We welcomed over 450 new customers to Piscataqua Savings Bank during the year.

    A recent Federal Reserve Bank payments study found that there were 20 million more electronic payments made in 2009 than in 2006. Automated Clearing House (ACH, or more commonly known as direct deposit) payments grew from 14.6 billion to 19.1 billion. Debit card usage now exceeds all other forms of non-cash payments while credit card use has decreased by 63%. Piscataqua Savings Bank has experienced the same trends. In 2010 we processed a total of 306,438 ATM and debit card transactions. This was a 12% increase from 2009. We also processed 125,000 ACH transactions. Due to the shift to electronic payments, the day to day traffic at the teller line has decreased and shifted the way we deliver support to our customers. In 2010 we made changes that focused on enhancing the customer experience.

    Last year we added another position to our Customer Service Department. We now have a third customer service representative available to assist customers who enter the Bank via the entrance from the parking lot. This individual also helps ensure telephone calls are answered quickly and routed efficiently. When calling the Bank between the hours of 8:30 am – 5:00 pm, a customer service representative will always be available to take your call directly without having to go through a maze of automated options.

    Online banking customers have experienced a new and improved bill payment product. This new system has many features and functions to make bill paying very quick and easy. There are over 400 billers that will allow customers to receive and view their bills, and make payments electronically. Customers can now see eighteen months of payment history for each of their billers. There is also a “person to person” feature that allows customers to pay any individual electronically regardless of where they bank. We are very excited about this improved service and customers are enjoying the new features.

    Piscataqua Savings Bank continues to support the educational efforts of its employees. In October Finance Administrator, Kate McManus, attended the Northern New England School of Banking. This program provides an introduction to bank management and is an excellent opportunity to provide career development for the employee while enhancing the Bank’s ability to provide quality, knowledgeable service to the customer. On June 13, Assistant Vice President/Information Technology Officer, Antone Cabral, completed his final week of study at the New England School for Financial Studies. This year-long program prepares banking professionals with the tools needed to manage effectively and trains them to make decisions that promote the profitability of the bank. Tony worked very hard completing four written assignments over the twelve month course of study. Many other employees attended more than 80 seminars, webinars and online classes to enhance their knowledge of banking products, procedures and regulatory requirements.

    Trust/Investment Management Results

    Richard G. Kaiser, Vice President/Senior Trust Officer

    The Trust Department had a good year for 2010, due in part, to the development of new and sizable trust relationships and global financial markets delivering positive returns for the second year in a row. 2010 can be defined, unlike the preceding year, by several risk on/risk off environments which increased market volatility and heightened investor sensitivity. During the first quarter of the year, investors’ comfort level in the global economic recovery remained high and financial markets rallied with the strongest gains registered in riskier assets such as high yield bonds, and emerging market debt. As mid-year approached the potential impact of the European sovereign debt crisis on the banking industry and the potential for a double-dip global recession rattled markets in the second quarter. Investors sought the safety of U.S. Treasuries and gold as they shunned global equities, commodities and real estate. During the second half of the year emergency liquidity and bailout funding measures in Europe and renewed quantitative easing (QE2) in the United States eased investors minds and the markets responded positively with equity markets, global real estate and commodities rising more than 20% during the second half of 2010. Global equity markets rose 12.7% as measured by the MSCI ACWI Index and emerging market equities were a significant contributor to global equity performance due to strong demand for commodities, robust infrastructure build-out and positive economic fundamentals compared with many developed nations. Domestically, the Dow Jones Industrial Average returned 14.05% vs. the Standard & Poor’s Index at 15.06% and the NASDAQ at 18.15%. In the fixed income markets, Treasuries posted gains of 9.4% for the year despite an increase in long-term rates near the end of 2010 due to heightened inflation concerns and anxiety regarding the U.S. budget deficit and debt levels. As in the previous year, the best returns came from longer maturity and lower quality issues with commercial mortgage backed assets returning 20.4% and corporate high yield bonds (junk bonds) returning 15.1%.

    The market’s positive performance plus the Department’s ongoing new business development propelled the Trust Department’s total market value again to an all time high at $166.7 million, an increase of $12.58 million or 8.16% from the beginning of the year. Market value appreciation attributed $3.6 million or 28.7% of this increase and net new business development of $8.98 million or 71.3% comprised the balance. During the past year, we made a concerted effort to increase the total of assets under management without significantly increasing the total number of managed accounts. At year-end the total number of Trust Department managed accounts grew to 377 from 374 last year. New business developed for 2010 was $19.5 million, $6.9 million over budget for the year, but $2.6 million less than 2009. Net new business, after distributions and terminating accounts, was at $9.0 million compared with $14.5 million last year. We saw strong new business growth from our existing client base as well developing new relationships from qualified referrals received from Bank and Trust clients, Trustees and Corporators, bank officers and staff as well as local attorneys, CPA’s and other professionals. Many new clients came on board because they desired to have their assets managed locally while other existing clients consolidated their assets and Bank accounts and put them under “one roof” for investment management and estate planning purposes. The average size account increased to $442,000 at the end of December from $412,000 a year ago. The composition of the Department continued to be consistent from last year with personal trusts and estates comprising 38% of our account base, IRA rollover accounts at 14% and investment management agencies for individuals and charitable organizations at 44% and custodial relationships at 4%.

    The Trust Department’s escalating market value positively impacted revenue for the year. Total revenue received was $1.24 million, $112,695 or 10.02% over last year. Trust Department expenses increased by 5.57% to $1.04 million from $988,677 last year, resulting in a net after-tax profit of $126,874, $36,837 or 40.91% greater than 2009.

    During the year, we began to migrate our administrative and operational functions to a new online real time platform called Charlotte Front Office which was developed by our trust accounting provider SunGard systems. We anticipate that the total process will be finalized during the late fall of 2011. Also, during 2010 we offered our clients the ability to view their statements, account holdings and transactions online through Portfolio Access Link (PAL). We find that senior clients still prefer to receive paper statements while our younger clients prefer the paperless “virtual” environment which gives them the ability to review their accounts daily from anywhere where there is internet capability.

    While contracts for our trust systems, i.e. trust accounting, custody, security clearing, tax service and investment data service remain in place for several years, we continue to scrutinize new programs which can be integrated with these platforms to create improved productivity and lower costs. During 2011 we will be reviewing a new trading order management platform for equities and mutual funds and a platform for developing comprehensive financial and investment planning models for clients and prospects.

    As we look toward 2011 in the Trust and Wealth Management arena, we were relieved by the passage of The Tax Relief, Unemployment, Insurance Reauthorization and Job Creation Act of 2010 (The 2010 Tax Act) in mid December. This act kept intact the Bush-era income tax rates and tax breaks for all wage earners for two years. Additionally, it makes dramatic changes to the estate, gift and generation skipping (wealth transfer) taxes as the amount that can be inherited free of federal estate tax was increased to $5 million ($10 million per married couple) with a flat 35% tax rate above the exemption amount. The Tax Act also included provisions for the portability of the exemption allowing a surviving spouse to use the deceased spouse’s unused estate tax exemption; and, the gift and generation skipping taxes were increased to equal the estate tax exemption of $5 million. However, the annual gift exclusion did not change and remains at $13,000 per year.

    In recent years the State of New Hampshire has significantly modernized its Trust laws to become one of the most progressive states and has become a leading jurisdiction for Trusts. Currently, there is a Senate bill in committee (SB50) which, if passed, will continue to uniquely position New Hampshire as one of the most attractive legal and financial environments for individuals and families seeking to establish and locate their trusts and investment assets here. This is very encouraging as we have recently received several very large family relationships that have moved their Trust relationships and banking business to New Hampshire and have named the Bank as their successor Trustee.

    As the Trust department grows, we a have great need to expand our office space to accommodate that growth. During 2011 the Bank will be renovating the third floor space (currently over the Trust Department) which will house Trust Operations and Trust Investments. No time schedule has been finalized yet. Additionally, along with expanded office space, we will be looking to adding to staff in the areas of administration and new business development to take further advantage of and be a beneficiary of New Hampshire’s favorable Trust and Wealth Management environment.

    What’s Ahead?

    Small community banks will face considerable challenges in the years ahead. Margins will be tighter. Even now, a realistic return on assets for a mutual bank is 50 to 75 basis points (or ½% to ¾%) on total assets; whereas, not too many years ago the standard was typically 100 basis points (1.0%) on assets. For a mutual bank, earnings are the primary source for building and maintaining capital. While increased regulations will further squeeze smaller banks’ earnings, larger institutions will absorb much of the regulatory expense through their economies of scale.

    The opportunities, however, for Piscataqua Savings Bank will be equally great. The Bank’s customers are loyal supporters of the Bank and appreciate the Bank’s commitment to the community. The Bank’s small size positions us to be responsive and to serve our customers in a very personal manner. Continual expanded use of technology will allow us to efficiently deliver services to meet the changing needs of our market.

    Our goal continues to be the same. Conduct business based upon strong values, keep a focus on providing exceptional service to our customers, and keep our business truly local so that we can have a very positive impact on the level of service we provide.

    Jay S. Gibson, President/CEO



    Jay S. Gibson
    President/CEO

    ANNUAL REPORT 2009

    what's new

    This past year epitomized the significant importance of a bank like Piscataqua Savings to its community. Few times in history has the public been as angry at the “big banks.” Most consumers may not understand the specifics of what happened to cause the financial crisis, but they have become much more aware that local banks operate in their best interest and bring economic stability to their community.

    During this past year of distress in the financial services industry, Piscataqua Savings was the beneficiary of unprecedented growth in every area of services that we provide to our customers: deposits, loans, trust services, and investment management. While most institutions were focused on problem loans and investments, Piscataqua Savings was able to concentrate on establishing relationships with new customers and providing a greater variety of services to our existing customers. These new and renewed customer relationships are very important to the future strength of the Bank.

    The Bank’s performance and accomplishments during 2009 were truly outstanding. I hope you will take the opportunity to read the following summaries by our senior officers of the positive results we experienced in each of their respective areas of the Bank.

    Financial Results

    Troy E. Neff, Treasurer/Financial Officer

    Balance Sheet:

    Total assets increased by over $13 million from year-end 2008. Most significantly, the loan portfolio increased by $20 million. This growth was funded by increased deposits from new and existing customers moving their money to a safe, locally owned and operated community bank. Total deposits increased during the year by $13.2 million. The securities portfolio decreased by $6.5 million and cash decreased by $647 thousand from year-end 2008 to further support the Bank’s extraordinary loan growth.

    The Bank held no securities which required any valuation write-down. The investment portfolio consists almost exclusively of non-callable US Government Agency bonds with stated maturities of three years or less.

    The Bank’s capital position remains one of the strongest among all banks in New Hampshire. As a mutual bank, we do not have the obligation of a stock-owned bank to provide a return to stockholders; but rather, we can utilize this strong capital position to reinforce our business model in providing very personal banking services to local individuals and families. The Bank’s capital by year-end had increased by more than $1 million.

    Earnings:

    The Bank’s net interest margin increased over the prior year as a result of the significant increase in the loan portfolio as well as by having the expense for interest on deposits decline faster than the decreasing yields on the loan and security portfolios. The level of net earnings produced by the Bank is proportionate to the strength of the net interest margin. Net interest income surpassed 2008’s level by $879 thousand.

    Non-interest income of $1.4 million in 2009 was behind 2008 by only $41 thousand. These results are much better than anticipated as the Trust Department was successful in growing their account base to offset prior declines in market value.

    Overhead expenses increased from $4.8 million in 2008 to $5.3 million in 2009. This increase was proportionate to the increased size of the Bank. Salaries, employee benefits, data processing, and other administrative expenses, including $218,000 of expensed FDIC assessments represented the most significant percentage of the increase. Included in this report is a new graph showing the trend of the Bank’s net income and its efficiency ratio. The efficiency ratio measures the cost to generate each dollar earned. The Bank’s ratio for 2009 was 75.21% meaning it cost the Bank $0.7521 for each dollar of net income earned. This metric has been a key factor in the Bank’s financial stability achieved primarily due to the lower cost of having a single-office location and having efficient and experienced employees.

    After-tax net profit increased from $889 thousand in 2008 to $1.09 million in 2009. These earnings exceeded the Bank’s rate of growth and continue to further strengthen the Bank’s strong capital position.

    Lending Results

    Richard M. Wallis, Executive VP/Senior Loan Officer

    During 2009 US banks experienced the largest decline in lending since 1942. According to the FDIC, US lending volume declined by 7.4%, eclipsing even the results during the 1991 recession. The decline in lending was, in part, due to the effects of the economy on banks, businesses and consumers. Some banks were forced to reduce lending to address problem loans and to increase their capital positions. Many needed to strengthen loan underwriting standards making it more difficult for borrowers to qualify for new loans. Business borrowing demands were reduced during a time of economic uncertainty and weak sales volumes.

    Consumer confidence was at the lowest point in decades postponing the purchases of automobiles and other consumer goods; therefore, reducing the demand for loans and credit cards. Consumer confidence was largely affected by the loss of jobs during 2009. Unemployment increased throughout the year resulting in fewer households and businesses that could qualify for loans. The national unemployment rate was 10.6% at year-end 2009. New Hampshire’s rate was less severe at 6.7%.

    Despite the national decline in lending activity, Piscataqua Savings was actively generating the largest loan volume for any year in the history of the Bank. Last year’s mortgage originations totaled $80.6 million. To put this in perspective, the 2009 mortgage loan volume was more than for 2006 and 2007 combined, and $23.6 million more than the record volume of loans originated in 2008. By the end of 2009 the Bank’s loan portfolio had grown by 15%. Piscataqua Saving’s lending directly impacted our local economy. Those dollars went directly to Seacoast residents to purchase new and existing homes or to refinance their mortgage loans making home ownership more affordable.

    According to Real Data Corporation, Piscataqua Savings Bank was the eighth largest mortgage lender in the eight communities of Greenland, Hampton, North Hampton, New Castle, Newington, Portsmouth, Rye, and Stratham. The Bank had a 2.77% market share of the dollar volume of mortgages made in 2009, surpassing all other local lenders. The Bank’s ranking and market share was very strong considering there were literally hundreds of institutional lenders that provided mortgages in our market area.

    In addition to record mortgage lending, the Bank also originated an unprecedented number of home equity lines of credit. Originations of home equity lines of credit totaled $9 million. Many borrowers use this type of financing for home improvements, financing purchases such as automobiles or children’s education. During the latter part of 2008 and into 2009, borrowers also used home equity lines of credit to supplement retirement income. Many retired individuals had experienced significant losses in their retirement investments, such as IRA’s and 401k’s in 2008. Retirees, wanting to allow their investments to recover, decided to use the flexibility of a home equity line of credit as a cash management tool allowing time for some recovery in the stock market.

    While nationally the number of foreclosures increased during 2009, NH foreclosures actually declined by 3% as tracked by the NH Housing Finance Authority (NHHFA). NHHFA reported there were 3,467 foreclosure deeds recorded in NH in 2009 while there were 3,563 recorded in 2008. NHHFA speculates that this decline was due to mortgage lenders’ continuation of loan restructuring and forbearance with borrowers. NHHFA surveyed those homeowners that received foreclosure auction notices to determine the main causes for the high level in mortgage delinquencies. Of the 788 surveys 65% of these homeowners had purchased their homes since 2000 and the rest prior to that year. Not surprisingly, the major causes of the delinquency problems were job loss or reduction of household income (29.5%) and decline in property value (16.7%). Foreclosure rates will remain at these high levels until delinquencies are brought under control. We are pleased to report that Piscataqua Savings had no foreclosures during 2009.

    Delinquency rates (thirty days or more past due) for residential mortgage loans skyrocketed nationally to 10.80% of total mortgage loans. This rate of delinquency was up by 3.75% over the previous year and by 7.49% over 2007. Piscataqua Savings Bank’s delinquency rate at year-end had increased minimally from 1.11% to 1.24%. This very low level of delinquencies presented a unique opportunity for the Bank’s lending staff to focus its efforts on new loan origination.

    A significant contribution to the Bank’s success in last year’s loan originations was the addition of two new loan officers to our loan department team. MaryEllen McKenney comes from a banking background and had been a Senior Loan Officer for GMAC Mortgage. MaryEllen also has an extensive background in the real estate industry having worked in real estate sales and as the Finance Director for The Housing Partnership. Rick Page also comes to us with an excellent reputation and an extensive history of home mortgage lending in New Hampshire. Rick previously worked for Ocean Bank and its predecessors as a Mortgage Loan Officer. MaryEllen and Rick bring a wealth of experience to our Loan Department.

    Deposit Operations and Compliance Results

    Joan W. Gile, Sr. VP/Operations

    The effects of the financial crisis in 2008 carried over into 2009 and customers continued the “Flight to Safety” primarily seeking security rather than higher interest rates. Many consumers realized the value of community banks for their adherence to safe and sound banking practices as well as the commitment to the area in which they are located. Piscataqua Savings benefited from this trend and the impact on deposits was favorable. Over 299 new customer relationships were built in 2009. This compares with 280 in 2008. Total deposits grew from $159 million as of December 2008 to $172 million by year-end 2009 representing 8.31% growth. The growth was primarily in money market and savings account deposits. Total money market accounts increased by $5.3 million or 19.77% and savings accounts increased by $4.2 million or 18.37%. Total certificates of deposit increased by almost $2 million or 2.30%.

    The Bank experienced growth in all electronic banking services. In December we connected our 1000th customer to our online banking system. Customers conveniently and safely monitor account activity, transfer funds and pay bills. During 2009 we averaged 15,500 account inquiries each month. Additionally, online banking customers transferred funds between Piscataqua accounts over 800 times per month. More than one third of the online banking users take advantage of online bill payment services as a very quick, safe and easy way to pay bills.

    While online banking is quick, convenient, and safe, we still value the personal face-to-face contact with our customers. In 2010 we plan to improve our customer service experience by adding another customer service area at the parking lot entrance to the Bank.

    The crisis in the financial industry has increased the focus on consumer protection regulations. While Congress debates the issues to determine the most effective way to protect consumers, we already devote substantial amounts of time and resources to ensure compliance with current regulations. In July, the FDIC completed Compliance and Community Reinvestment Act (CRA) examinations at the Bank. The compliance exam covered three major components: board and management oversight, our compliance program and compliance audit. Although FDIC regulations prohibit publication of our actual ratings, the Bank had no significant issues of compliance which needed to be addressed. The CRA segment evaluated the Bank’s record of meeting the credit needs of our community, including low and moderate income individuals and families. The FDIC publicly rates the results of all CRA examinations, as follows: Outstanding, Satisfactory or Needs Improvement. The FDIC rated the Bank as “Outstanding.” At the time of reporting the Bank’s examination results, the FDIC announced that nationally there were 89 examinations during this period. Piscataqua Savings was one of only two banks in the country to receive an “Outstanding” rating.

    Piscataqua Savings supports the ongoing educational efforts of our employees. Assistant VP/Information Technology Officer Antone Cabral is currently attending the New England School of Financial Studies. During the School’s twelve month schedule there are two one-week sessions held at Babson College in Wellesley, MA and five written assignments. The first session was an intense week focused on asset/liability management, interest rate forecasting and strategic planning. Other sessions include lending, marketing, and the human resource function.

    Trust/Investment Management Results

    Richard G. Kaiser, VP/Senior Trust Officer

    The Trust Department’s results for 2009 were better than anticipated or expected. At the beginning of the year we projected that 2009 would be an extremely difficult year, not only for the U.S. economy, but also for global economies and their equity, bond and money markets alike. Throughout 2009 we continued to see deleveraging of the housing, financial and credit markets which had begun as far back as mid 2006. During the first nine weeks of 2009, our projections held true as the virtual disappearance of liquidity in the markets and investor’s continued aversion to risk drove all markets downward. However, after March 9th when the markets bottomed (capitulated), the economy and investor’s confidence started to turn around due in part to the massive injection of fiscal and monetary stimulus that had been provided during 2008 and early 2009 by the US Treasury and the Federal Reserve. As a result, capital markets started to thaw and positive earnings projections were being announced for the first time in a year. Large money center banks and brokerage firms were able to tap into the capital markets to shore up their balance sheets and began repayment of TARP funds. Although in March we were still deeply amidst the recession, investors decided to reenter the markets and take on greater levels of risk. From March until the end of December we saw strong advances in both the equity and fixed income markets with the S&P 500 returning 26.4%, the Dow Jones Industrial Average 22.6%, the NASDAQ 45.3%, and the MSCI Emerging Markets returning 78.5%. In the fixed income markets, Treasuries fared poorly during the year with negative returns on short and long bonds (-2.2% and -12.19%, respectively) while very strong positive performances came from longer maturity/lower quality issues of corporate high yield bonds (junk bonds) at 58.2%, and commercial mortgage-backed assets at 28.4%.

    Robust performance in the markets and very strong new business development procurement stepped up the total market value of assets managed by the Trust Department to a new year-end high of $154.1 million, a $19.7 million or 14.6% increase over the end of 2008. Of this increase, $5.2 million or 26.5% was a result of the markets’ rebounding after March 9th and $14.5 million or 73.5% was attributable to new business growth. The total number of accounts managed grew to 374 from 350, a 6.9% increase.

    The significant growth in new business was due to solid referrals from existing clients, Bank Trustees and officers, as well as local attorneys, CPA’s and other professionals.

    Increased market value impacted the Department’s income positively as revenues were $1.12 million, 18.5% over budget and slightly higher than 2008. Expenses for the Department were $30,863 or 3.0% less than budget. After-tax net profit was $90,037; down $24,590 from 2008.

    During 2009 we activated Portfolio Account Link platform (PAL) to our trust accounting system allowing our clients the ability to view their account’s portfolio and transactions online. This not only affords our clients greater convenience, but in many instances also lowers our costs by eliminating the preparation, handling and mailing of paper statements.

    We believe that in 2010 the economy (GDP) will continue to grow at 2½% to 3%, inflation will be benign and the Federal Reserve will continue their accommodative monetary stance by keeping short-term interest rates low until, perhaps, the end of the year. New business development, albeit not as robust as 2009, should continue at a solid pace as prospective clients seek the advantages of a locally operated bank and trust department and as a result of further consolidation in the banking and trust and wealth management arena.

    What’s Ahead?

    There will continue to be great opportunity for the Bank to differentiate itself from other banks and financial service providers. Local individuals have an increased appreciation for the Bank’s commitment to its customers and the community. The Board of Trustees and management’s role will be to identify those risks which might jeopardize the future viability of the Bank. Anticipated legislation to be passed by Congress may unintentionally create undesired results in various ways: a) by imposing the same regulatory environment on small banks as on large which disproportionately burdens a bank like ours – even though banks like Piscataqua Savings did not participate in the activities that put the stability of the entire financial industry at risk; b) by not adequately addressing the “Too Big to Fail” concept that benefits large institutions and lowers their cost of doing business; c) by continuing to allow credit unions to operate at an overwhelming competitive advantage of offering almost all of the sophisticated consumer financial services as a bank yet, remarkably, remain exempt from payment of any federal income taxes (unlike other businesses or you and I!).

    Our goal continues to be the same. Conduct business based upon strong values, keep a focus on providing exceptional service to our customers, and keep our business truly local so that we can have a very positive impact on the level of service we provide.



    Jay S. Gibson
    President/CEO

    ANNUAL REPORT 2008

    what's new

    The year 2008 presented a challenging environment including nothing less than a recessionary economy, dysfunctional credit markets, a collapse in consumer confidence, and major losses throughout the investment markets. In the midst of these conditions Piscataqua Savings Bank remained strong. The Bank benefited from its independent mutual form of ownership and its focus on serving local individuals and families. Over the years the Bank continued to adhere to strategies of underwriting home mortgages responsibly, investing in securities that provide liquidity with minimal credit or interest rate risk, operating from a single office with a small staff to keep overhead low and customer satisfaction high, and maintaining a very strong capital position. The turmoil in the financial industry has raised awareness or served as a reminder for many people of the advantages of doing business with Piscataqua Savings Bank.

    Last year we emphasized the Bank’s strengths through an increased marketing effort that included redesigning our website, updating our logo, expanding our presence in the media through advertising, letters to the editor, and articles published about the Bank. We also took a more active role in the legislative process by testifying in support of NH Senate Bill 315. This bill was targeted at preventing unscrupulous companies from using another financial institution’s name to deceptively market high risk loan products to our customers. The bill was signed into law by Governor Lynch on September 2, 2008.

    In 2008 the Board of Trustees devoted significant efforts to reviewing their oversight of corporate governance structure and procedures. The Bank engaged John Funk, Esquire of Gallagher, Callahan, and Gartrell to work with the board and senior management in developing updated corporate documents. This effort was not only to comply with current law, but also to establish clear guidelines for corporate processes which will protect the Bank’s mutual charter into the future. Additionally, the Board established a Governance Committee which will meet regularly each year to oversee and be supportive of sound corporate governance practices.

    The Bank’s performance and accomplishments on the whole were very positive during 2008. I hope you will take the opportunity to learn more about the Bank’s progress and accomplishments by reading the following comments below by our senior officer’s for their respective area of the Bank.

    Financial Results

    Troy E. Neff, Treasurer/Financial Officer

    Words that were used to describe the 2008 financial markets were “meltdown and crisis.” The markets demonstrated extraordinary volatility and instability. News commentators were constantly informing the public that the markets were operating in a broken fashion or in some cases not at all. The federal government took unprecedented action with the takeover of Fannie Mae and Freddie Mac along with the bailout of AIG. The government has also taken substantial equity positions in Citigroup and Bank of America. Many community banks have taken capital injections from the government’s Capital Purchase Program (CPP), a program designed for healthy banks, but public perception has been negative.

    Balance Sheet:

    In 2008, total assets increased by $20 million when compared with year-end 2007. The loan portfolio increased by $15.7 million. This growth was funded by depositors seeking a safe haven for their funds. Total deposits increased by $18.3 million. The securities portfolio increased by $1.4 million and cash and cash equivalents increased by $3 million from year-end 2007.

    Piscataqua Savings was not required to recognize any impairment in the securities portfolio. The Bank had no holdings of the Fannie Mae or Freddie Mac preferred stock that forced thousands of institutions to write off these securities and in many cases resulted in institutions experiencing negative earnings for the year. The Bank’s investment portfolio consists predominantly of non-callable U.S. Government Agencies with stated maturities of three years or less.

    Capital increased over the prior year with the addition of 2008’s year-end earnings. The Bank’s capital position remains one of the strongest in the State of New Hampshire. As a mutual, the Bank does not have the obligation of a stock-owned bank to provide a return to stockholders; but rather, we can utilize this strong capital position to support our business model of remaining a very personal bank gearing our services exclusively to individuals and families.

    Earnings:

    The narrowing spread between the yield on earning assets and interest expense has a direct effect on the Bank’s earnings potential. The level of net earnings produced by the Bank is proportionate to the strength of the net interest margin. Margin pressure is being experienced nationally by most community banks, especially those that specialize in residential mortgage lending.

    Despite this margin compression, net interest income increased from $4.5 million in 2007 to $4.8 million in 2008. Interest income for 2008 was comparable to 2007’s level of $9.1 million. This is the direct result of extraordinarily strong loan activity in the first half of the year. Interest expense decreased as market interest rates fell following the Federal Reserve’s interest rate cuts and the supply of deposits increased in the marketplace. As a result, total interest expense decreased by $350,000 from 2007 levels even though deposits increased by $20 million.

    Non-interest income of $1.3 million in 2008 remained comparable to 2007 levels.

    Non-interest expense increased from $4.4 million in 2007 to $4.8 million in 2008. Salaries and employee benefits experienced a minimal increase from 2007 levels. The more significant increase was attributable to data processing and other administrative expenses related to the increased number of accounts being serviced by the Bank.

    After-tax net profit increased from $865,348 in 2007 to $888,963 in 2008. The level of earnings continues to be sufficient to further strengthen the Bank’s strong capital position.

    Operations Results.

    Joan W. Gile, VP/Operations Officer

    The Bank experienced substantial activity in opening new deposit accounts during 2008. With much of the media’s attention on banking and other financial institutions, many individuals reviewed their own financial situation. FDIC insurance became a huge focus and much time was devoted to analyzing coverage and assisting customers in structuring their accounts to maximize FDIC coverage. On October 3, 2008, the FDIC temporarily increased its coverage from $100,000.00 to $250,000.00 per depositor through December 31, 2009. Although this increase helped calm many fears, many new depositors turned to Piscataqua Savings Bank for its reputation for adhering to safe and sound banking principles. Over 280 new customer relationships were built in 2008. This compares with 197 in 2007. Total deposits grew from $141 million as of December 31, 2007 to $159 million by year-end 2008 representing 13% growth. This growth was largely in Certificates of Deposit. The number of new checking and savings accounts also increased significantly. We opened over 750 new checking and savings accounts in 2008. These accounts are fundamental core deposits and help build lasting relationships. Customers with multiple account relationships are more likely to continue to build their connection with the Bank and are less likely to move to other financial institutions.

    This flight to safety continued into the fall and winter months and significantly impacted Individual Retirement Accounts. As the news from Wall Street floundered, many customers moved their retirement accounts to the safety of the Bank’s IRA Certificates of Deposit. Total IRA CDs increased by almost $1 million in 2008.

    Piscataqua Savings Bank has experienced increased growth in all electronic banking services. Most customers take advantage of at least one form of electronic banking service each month. There are over 12,000 automatic transactions such as direct deposit or direct withdrawals each month. In addition there are over 21,000 ATM and Debit Card transactions monthly.

    Online banking activity continues to increase as a very convenient way to monitor account activity, transfer funds, and pay bills. In 2008, we averaged 14,000 account inquiries each month. Additionally, banking customers viewed an average of 500 checks online each month. About a third of the online banking users take advantage of the online bill payment services as a very quick, safe and easy way to pay bills.

    While online banking has increased, many customers continue to utilize telephone banking. Our HomeTeller is a convenient way to check balances and transfer funds between accounts. On average, 300 customers make over 2,500 inquiries each month by calling the HomeTeller.

    While electronic banking services are quick, convenient and safe, we still enjoy the face-to-face contact with our customers each day in the Bank. Our experienced staff is always ready to assist customers in person or on the phone. Please call or stop by if you would like information on any of our products and services.

    To respond to the ever-changing needs of our customers, Piscataqua Savings began offering Health Savings Accounts (HSAs). HSAs offer a convenient, tax-deductible means to save and pay for qualified medical expenses. The Piscataqua Savings Health Savings Account offers very competitively tiered interest rates with no monthly service charges, the convenience of check writing and debit card capabilities, as well as online access. Monthly statements provide images of checks written and detailed descriptions of debit card usage. We expect this product will be in even greater demand in the future and will be one which we will actively market.

    Piscataqua Savings Bank continues to support the educational efforts of our employees. In October Susan Hauge (Customer Service Representative), Stephanie Nagel (Bookkeeping) and Mary Ayer (Compliance Specialist) attended the Northern New England School of Banking. This program, held at UNH, provides an introduction to bank management and is an excellent opportunity to provide career development for employees while enhancing the Bank’s ability to provide quality, expert service to our customers.

    Lending Results

    Richard M. Wallis, Senior VP/Senior Loan Officer

    The nation has been in the grips of a credit crisis that created havoc for mortgage lenders across the country. Since late 2006, over 300 major lending operations across the country have closed.

    While many lenders scrambled to generate new mortgage business, it has been busier than ever for the Loan Department at Piscataqua Savings Bank. Many borrowers were seeking a financially solid lending institution to do business with during these uncertain economic times. With plenty of money to lend at favorable terms, the Bank experienced a record year for mortgage originations. The Loan Department originated $57.1 million in mortgage loans, the highest volume of lending for a single year in the bank’s history. This high loan volume enabled the Bank to increase the loan portfolio by $15.7 million or 13.36% over 2007 year-end.

    As we look ahead, there appears to be more uncertainty in the economy that could have an impact on the Bank’s loan portfolio. Unemployment has increased to levels not seen in decades and home values continue to decline. According to the Bureau of Labor Statistics, the national average unemployment rate as of December 31st was 5.8%. Most of New England, especially New Hampshire, continues to have lower than national average unemployment. New Hampshire had the lowest unemployment rate in New England at 3.8%. Many economists are forecasting unemployment to reach 10% nationally before we start to see any improvement. Home prices continued to decline throughout 2008 with the average price declining 8% for New Hampshire. According to a study by First American CoreLogic, 21% of all mortgages in Rockingham and Strafford counties had negative equity as of December 31, 2008. These economic factors will have an impact on both the growth and performance of the loan portfolio during 2009 and beyond.

    Mortgage delinquency rates have increased slightly over the past year. Piscataqua Savings Bank’s delinquencies were 1.11% of total loans on December 31, 2008, up from 2007 when it was 1.06%. This compared very favorably to the national average delinquency rate of 6.92%, as reported by the Federal Reserve Statistical Release. In 2007 the national average delinquency rate was at 3.31%, more than doubling in the one year time period. If the economy continues to deteriorate, additional efforts may be required to manage the loan portfolio, but we continue to be in a good position to weather the storm.

    Trust/Investment Management Results

    Richard G. Kaiser, VP/ Senior Trust Officer

    This past year, 2008, was unlike any other year that we can remember in our collective trust careers. During the year, volatility in the markets tested the mettle of most investors as there was a never-ending series of events which affected the stock, bond, credit, and cash equivalent markets alike. Throughout 2008, we saw the continued de-leveraging of the housing market which started in the summer of 2006, the de-leveraging of the financial sector which began in 2007 and the de-leveraging of the consumer which began in 2008. The reduction in leverage and virtual disappearance of liquidity in the markets along with investors’ heightened aversion to risk were catalysts to precipitate the market drops most notably between September and December of 2008. As difficult as the first three quarters of 2008 were, the major indices fell more in the fourth quarter than they did in the first three quarters. At year end the Dow Jones was off 31.9%, the Standard & Poor’s down 37% and the NASDAQ falling 39.9%. International stocks, as measured by the MSCI EAFE Index, lost 43.1%. Unlike prior years there were no “safe havens.” There were no sectors in the S&P which provided a positive return for the past 12 months. The only asset group which bolstered a positive return for 2008 were Treasury issues which had an annual return of 5.24%. Unfortunately, other fixed income instruments fared poorly with corporate bonds, asset-backed securities and securitized home equity issues down in excess of 36% for the year.

    Despite the extreme volatility during the year and poor performance in almost every market, the number of Trust Department accounts grew during the year from 332 to 350, a 5.42% increase. This was due to our continued efforts to develop new business through local attorneys, CPAs and other professionals, as well as to increase market exposure through the Bank’s website, media advertising and in-house referrals. While there was an increase in our account base, the market value of the department declined from $153.7 million at the end of 2007 to $134.4 million on December 31, 2008 a decrease of $19.27 million or 12.5% due primarily to the devaluations in the markets. New business for 2008 was $13.7 million, $1.7 million over the budget for the year; however, $3.68 million less than for 2007. Net new business after distributions of principal and terminations of accounts came in at $4.6 million compared with the prior year’s net of $9.1 million.

    Although the year over year net new business and Department’s market value was down, this was the third consecutive year in which Trust Department revenues exceeded $1 million. Total trust fees for the year were $1.1 million, $16,700 or 1.5% over budget and $6,200 over 2007. Expenses for the year came in at $36,000 or 3.96% over budget for an after-tax profit of $114,600; 10% less than budget and $66,100 less than 2007.

    We believe that 2009 is going to be an extremely difficult and challenging year for the U.S. economy, global economies and equity, bond, and cash equivalent markets alike. The excesses which precipitated the markets last year took many years to develop and it may take several years before these excesses dissipate enough for credit markets and hence the equity and bond markets to begin to function normally. Because of this, we anticipate that the economy will probably continue to contract during 2009 which portends that it may take several years before the economy turns around and returns to a normal growth pattern. This will affect our Trust Department account market values on which fees are taken and our contribution to the Bank’s bottom line. To help mitigate this, we will be attempting to maintain or, if possible, increase new business by continuing to develop highly qualified referrals from professionals, Bank officers, Trustees, Corporators and staff. This will be done, in part, by continuing to use the Cannon Financial Institute teleconferencing program, the Bank’s website, targeted media campaigns and a new outreaching to Bank clients’ through hosting topical seminars. Along with trying to maintain our fee income through increased new business development, it remains incumbent upon us to continue to contain our overhead costs during the year. To that end we have been reviewing all of our third party relationships to determine if costs can be further discounted by contract renegotiation or streamlining the services provided. Some of the areas already reviewed have been our SunGard Trust accounting system, Bank of New York Mellon custody platform and Thomson Reuters Fast Tax Service. We will still be reviewing our mutual funds settlement system, pricing, and model/performance measurement systems for further savings.

    What’s Ahead?

    The uncertainty in 2009 and for the years ahead is broad and deep. How will Congressional efforts to bail out large banks and companies affect us? Will community banks like ours be unfairly burdened as subsidies are awarded to those large institutions that created this financial mess? To what extent will unprecedented federal deficits and the national debt hamper the economy in the future…do we prepare for extended periods of deflation or inflation? As Congress and the Treasury map out a “new era of financial market regulation,” how much more regulation will be imposed upon well-run, well-capitalized community banks like ours that have always been highly regulated by both state and federal agencies? The financial cost and human resource drain for regulatory compliance is already very burdensome to a small bank like ours.

    The Bank’s recent ability to remain strong has been the result of our reputation for being conservative, conducting our business based upon strong values, keeping our focus on providing personalized consumer banking services, and keeping our business truly local so that we can have a very positive impact on the level of service we provide to our customers. With this same commitment I am sure we can weather these future uncertainties; thus, our current advertising says:

    “Here Today. Here Tomorrow. That’s what we’ve been saying since 1877.”



    Jay S. Gibson
    President/CEO

    ANNUAL REPORT 2007

    what's new

    A look back at 2007 reflects well on the many strengths of Piscataqua Savings Bank. I have outlined several of the Bank’s most significant results. I do hope you will take the opportunity to read each of our senior officer’s summary for the results within their area of the Bank.

    • Earnings improved
      • Net interest income and net profit increased
      • Income from trust/investment management services increased
    • Trust/investment assets under management increased significantly
    • The mortgage portfolio grew substantially
    • New deposit and mortgage products were developed in response to market demand
    • Capital increased in $’s and as a % of total assets
    • Asset quality is excellent for both the mortgage and securities portfolios

    These successes, during a period of such uncertainty in our national economy and financial markets, are a result of the Bank’s reputation for being conservative, conducting our business based upon strong values, keeping our focus on providing personalized consumer banking services, and keeping our business truly local so that we can have a very positive impact on the level of service we provide to our customers.

    Financial Results

    Troy E. Neff, Treasurer/Financial Officer

    The 2007 financial year demonstrated the stability of Piscataqua Savings Bank. The national economy slowed with a possible recession looming for 2008 as a direct result of sub-prime mortgage lending. The Federal Reserve instituted rate cuts to inject liquidity in the financial markets, the treasury yield curve experienced a downward shift, and inflation increased as the US dollar continued to weaken. Despite this challenging economic environment, the Bank’s loan portfolio grew, and revenue from trust activities continued to generate new highs.

    Balance Sheet:

    Total assets by year-end were nearly flat compared with 2006; however, that does not mean the balance sheet was stagnant. The securities portfolio was reduced by $9.61 million as the loan portfolio increased by $9.44 million. Cash and cash equivalents levels were slightly elevated from 2006. Premises and fixed assets remained flat, as no major additions were made in 2007.

    The securities portfolio underwent a significant restructuring in 2006 to provide more control over liquidity. This strategy proved beneficial as loan demand was strong and we deployed maturing securities into local mortgages added to the loan portfolio. This shift from lower yielding securities to higher yielding mortgage loans was the most significant contributor to the Bank’s increased earnings.

    Total deposits experienced a slight decrease from $141.96 million in 2006 to $140.62 million in 2007. The decrease is primarily attributable to outflows in money market accounts as the result of seasonal year-end withdrawals. Certificate of deposits remained stable. A concerted effort was made to shorten the overall maturities of the CD portfolio by offering a 9-month special. This restructuring allowed management to be prepared for further rate cuts by the Federal Reserve.

    Capital levels increased over 2006 with the addition of 2007’s year-end earnings. The Bank’s capital position remains one of the strongest in the state of New Hampshire. As a mutual bank, we do not have the same obligation as a stock-owned bank to provide a return to stockholders; but rather, we can utilize this strong capital position to support our business model of remaining a very personal bank that provides services exclusively for individuals and families.

    Earnings:

    Net interest margin compression continues to limit earnings potential. Yields on the Bank’s earning assets continue to minimize potential earnings after interest expense. The level of net earnings produced by the Bank is in proportion to the strength of the net interest margin. Margin pressure is being experienced nationally by most community banks, especially those that specialize in residential mortgage lending.

    Despite the margin compression, net interest income was a $105,600 greater in 2007 than 2006. This was achieved by total interest income outpacing 2006 levels by $1.13 million as a result of loan growth early in the year. Deposit costs were nearly $1 million greater in 2007 than 2006, $4.55 million, and $3.53 million, respectively.

    Non-interest income increased from $1.04 million in 2006 to $1.36 million in 2007. The increase is primarily the result of the Trust Department recognizing record fees income.

    Non-interest expense also increased a minimal 3.21% from $4.36 million in 2006 to $4.50 million in 2007. This modest increase demonstrates the conservative overhead structure of this institution.

    After-tax net profit increased from $680,400 in 2006 to $865,348 in 2007. This increase reversed the trend of decreasing net profit which started in 2004.

    Operational Results

    Joan W. Gile, VP/Operations Officer

    In 2007 we actively sought to increase deposits through growth in new customers as well as by broadening current relationships. We developed the Premier Money Market Account to attract customers with higher balances that have a need for liquidity. Our Premier Money Market Account pays a higher interest rate than regular money market accounts for balances of $25,000.00 to $250,000.00. Our Companion Checking Account was developed to expand our relationship with existing mortgage or trust/investment customers who may not currently have their checking account at Piscataqua Savings. This account offers all the features of our regular NOW Checking account, but also waives fees for other services such as wire transfers, stop payments and Piscataqua Savings’ fees at other banks’ ATMs.

    We opened almost 30% more checking and money market accounts in 2007 over 2006 as a result of these two new products and our increased marketing efforts.

    Online banking continues to be an area that is growing in popularity among Piscataqua Savings’ customers. The number of customers utilizing the online banking system grew by 26% in 2007 and more than a third of our online customers are paying bills from our online banking site. With the increase in postage rates due in 2008, we expect this number to continue growing.

    The growth of debit card use at Piscataqua Savings mirrors what has been happening nationwide. Prognosticators indicate that by the year 2014, debit card use will outpace credit card usage. This volume of debit card transactions has increased the level of fraud. To be vigilant in protecting our customers from fraudulent transactions we implemented a program that alerts us to potential fraudulent or unusual transactions. This system looks at each transaction, compares it with other transactions the customer commonly makes, and alerts us if it appears unusual. We can then contact the customer to validate the transaction. If the transaction is not legitimate, we can disable the card immediately to protect the customer from further fraudulent attempts. The intent of this system is to stop fraud before it happens.

    Our increased use and reliance upon technology drives our Information Technology Department to be proactive in upgrading systems and software to keep up with industry standards and the ever-changing technical world. During the year, we added three new servers to our network and upgraded the server in the Trust Department. We have also upgraded cabling and origination software in the Loan Department. We also installed the internet connectivity at Griffin Park to make it a fully functional disaster recovery site. We strive to maintain the most current hardware and software systems available as technology continues to be a priority in achieving continued success.

    Lending Results

    Richard M. Wallis, Senior VP/Senior Loan Officer

    ‘Subprime’ is the United States word of the year for 2007 according to the American Dialect Society. It became a household word because of the impact that subprime mortgage loans has had around the world. Subprime loans are mortgage loans made to borrowers with damaged credit histories or those that could not prove that they had sufficient income to make the monthly payments.

    These loans filtered through the financial markets as mortgage backed securities with an estimated value of $1.3 trillion and were purchased by institutional investors all around the world. Due to the poor credit quality of these loans, defaults are expected to reach $200-$300 billion.

    Because the full impact is not yet known, there is uncertainty in the financial markets that has placed downward pressure on the economy. Lending activity has been reduced since fewer borrowers are eligible for financing. In certain areas, home values have stopped appreciating and are declining. Much of the growing economy, leading up to 2007, was fueled by consumer spending financed through the equity in their homes.

    Asset quality has always been the focus of Piscataqua Savings Bank’s lending activity. Prudent lending has resulted in a loan portfolio that has performed well in both good times and bad. As of year end 2007, the Bank’s delinquent mortgages, those loans 30 days or more past due, represented only 1.06% of total mortgages. The national delinquency rate for delinquent mortgage loans was 3.43%. The national delinquency rate for subprime mortgage loan was 17.31%. Piscataqua Savings Bank did not originate any ‘subprime’ mortgage loans and has none in its portfolio. While the Bank cannot avoid the effects of the downturn in the housing market, we are well positioned to weather the storm.

    This slowdown in the housing market has actually created opportunities for the Loan Department. Fewer lenders exist due to market decline and mortgage company failures allowing us to compete for a larger percentage of the market. Jumbo loans, which are those loans originated over the Federal National Mortgage Association limit of $417,000, have been affected by the troubles of the subprime market. As a result, jumbo loan rates have been as much as a full percentage point above conventional loan rates. The Bank offers portfolio mortgage loans up to $1,000,000 with rates that are favorable to the competition’s jumbos by as much as one and one half percentage points. This allows us to offer a tremendous price advantage to local borrowers seeking a mortgage greater than $417,000.

    Despite the declining housing market and economy, the Bank’s 2007 mortgage originations for portfolio were $32.7 million of mortgages. Volume was up 17.6% over 2006. While pay-offs were at historical lows, the mortgage portfolio was able to grow by 9.2%.

    In an effort to increase mortgage originations, the Loan Department has developed a correspondent program for buying local mortgages. The program utilizes a reputable mortgage company that originates loans suitable for our portfolio. Each loan is underwritten to our standards by one of our loan officers in order to maintain loan quality. Once the loan is processed and closed by the mortgage company it is purchased and added to our portfolio. This arrangement allows the Bank to increase loan originations without adding personnel to the department. To date this program has brought in $1.7 million in additional mortgage loans that we would not have received otherwise.

    In 2007, the Loan Department established a correspondent relationship for selling loans to SunTrust Mortgage. Although most loans the Bank originates are either loans held in our portfolio or loans that we will service, this relationship with SunTrust will allow us to provide loan products not suitable for our portfolio such as, jumbo fixed rates loans and non-owner occupied fixed rates loans. At times this arrangement will also enable us to offer a conventional fixed rate mortgage at an even lower rate for those applicants willing to forgo having their loan serviced by the Bank.

    Given the opportunities presented to Piscataqua Savings Bank, such as reduced competition, lower interest rates, improved products, additional delivery systems, and a solid banking image, 2008 looks to be another promising year.

    Trust/Investment Management Results

    Richard G. Kaiser, VP/Senior Trust Officer

    Since the inception of offering trust/investment management services in 1995, the Trust Department has successfully offered outstanding service to its clients, attracted new business, complemented the Bank by broadening customer relationships, and by adding financially to the bottom line. 2007 proved to be a very successful year as we again set new highs for the market value of assets under management and for net earnings contributed to the Bank.

    These results were due to a combination of proactively developing new business and positive market returns. Market value of the Department increased to $153.7 million, up $13.5 million or 9.62% over last year. Of this increase, $9.8 million was organic growth resulting from new business; and, $3.7 million was attributed to market appreciation. The new business effort brought in gross new business of $17.38 million vs. $12.98 million in 2006, an increase of $4.4 million or 34.9%.

    As of year-end, the Department managed 332 accounts, up from 312 a year ago. Total income of $1.12 million exceeded budget by 11.9% and exceeded the prior year’s results by 8.2%. Stringent control over expenses continued as the Department was under budget by 0.38%. Net profit after taxes was $180,800, an increase of $10,400 or 6.1% greater than 2006.

    The increase in net new accounts, market value and related fee income was a direct result of the expansion our marketing efforts throughout the year. The billboard campaign was very successful and was well received by our clients and prospects (and proved to be a continual topic of conversation). Quite clearly it heightened awareness around the Seacoast that the Bank has a Trust and Investment Department. Also, the continued outreach program to increase qualified referrals from local attorneys, CPAs, and other professionals benefited from the Bank’s presentation of the Cannon Financial Institute Teleconference Series. The Bank offered local professionals the opportunity to attend these informal luncheon teleconferences to learn about the latest estate planning, wealth advisory, tax and legal topics. These sessions were conducted by nationally renowned estate planning attorneys. Professional educational credit was given to those in attendance. Through this program we have increased our exposure, developed several large new accounts, and have become recognized as a strong local resource for professionals to address their client’s needs.

    During the past year we have also been gratified by the relationships that have been developed from referrals given to us by fellow Bank officers, staff, Trustees and Corporators. Having us serve the Bank’s current client base not only addresses their Trust and Investment management needs locally in a very “hands on and personal way” but at the same time strengthens their loyalty to the Bank.

    Looking Ahead

    While the economy of the Seacoast area has been relatively stable and Piscataqua Savings Bank has remained strong, we cannot overlook the potential effect that a continuation of economic decline and further uncertainty of the nation’s financial industry will have on all banks. The banking system is founded on consumer and business confidence. In light of the recent failures or weakened positions of many financial institutions including large investment firms, home mortgage lenders, insurers, banks, and rating agencies during the past year, we should increasingly expect concerned depositors, borrowers, and investment clients to consider and query the stability of the banks with which they do business.

    Even in these uncertain times, I remain more optimistic than ever that “bigger is not better,” and Piscataqua Savings Bank’s strong financial base, mutual charter, and the very personal connection we have to our customers and the community will serve us well into the future.



    Jay S. Gibson
    President/CEO

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