ANNUAL REPORT TO THE MEMBERS OF
PIONEER FEDERAL SAVINGS AND LOAN ASSOCIATION
APRIL 18, 2017
As I was preparing this report and looking back on last year’s notes I realized this will be the first time in 30+ years anyone other than Tom has given the annual report. To say those are big shoes to fill would be a huge understatement. I would like to give you a review of our past year as well as a sense of the coming year.
I would like to begin with a little history of our industry- especially the history of mutual savings banks such as ours. Mutual savings banks in the United States date back to the early 1800s. Originally these institutions were organized to help the working classes because most commercial bankers at the time primarily served retail and commercial business. Mutual saving banks provided a safe place where the small saver could deposit money and earn interest. Today, mutual institutions continue the tradition of operating for the benefit of their depositors, borrowers, and surrounding communities. As most of us are aware Pioneer Federal Savings and Loan Association is the only mutual operating in MT- as well as there are only approximately a dozen operating in the Western United States.
Mutual banks are among the strongest in the country as evidenced by these two points:
- The average Tier 1 Capital ratio (a barometer of capital strength and safety) for all mutual banks was 12.36% and the average risk based capital ratio was 25.30%. The OCC considers a bank to be “well capitalized” (highest ratio for safety and soundness) if a bank’s Tier 1 Capital ratio is at or above 8% and its risk based capital ratio is at or above 10%.
- Since February 2007, over 350 financial institutions with over $600 billion in total assets have failed. Of those failed institutions, only 12 were mutual institutions with total assets of approximately $2 billion.
I will discuss Pioneer Federal’s capital ratios later in the report, but remember these figures as you hear ours.
The banking industry has made people’s lives more convenient over recent years with innovations such as mobile banking on phones or tablets, where customers can make loan payments, transfer money, pay bills, remote deposit capture, etc. As a local community bank, we need to be able to offer all the innovative services but we also continue to help people buy their first cars or families to buy their first, second or even third homes. We help businesses start up and existing businesses to expand. We help in bringing jobs and new opportunities to the communities we serve.
Bank regulation, or shall I say fair bank regulation in comparing regulations imposed on big banks versus smaller community banks such as Pioneer Federal, has been a topic discussed over the years and really has come to the forefront with the implementation of Dodd-Frank. The new administration is working diligently for fair regulations, meaning the Pioneer Federal’s of the world shouldn’t necessarily face the same regulatory standards as the Wells Fargo’s of the world. We in the industry will be following closely what comes in the near future as far as some regulatory relief or restructuring, obviously we know that regulation of the industry is needed, but the regulations must make sense for everyone. In a time of economic stress, regulatory policy often times has a tendency to become overly cautious- basically too much regulation can be as bad as too little regulation. It can get in the way of lending and creating economic growth that we need to keep our communities as well as our country moving forward. Also, regulatory compliance is expensive in terms of dollars and manpower, for example, we now currently have two full-time employees working in the area of compliance when it wasn’t that long ago we had one employee working half time on compliance.
Mutual institutions such as Pioneer Federal have changed over the years and so have our customers. What has not changed is the conviction the mutual structure best serves the banking and credit needs of our communities. Pioneer Federal is known for our commitment to our communities and our mutual charter allows us the flexibility to help our communities grow. Mutual banking is community banking at its finest, where our officers, directors and employees know our customers because they are our neighbors.
As members you should be proud as well as comfortable with the decisions made by your Association over the years which prepared us to survive these unsettled economic and regulatory times as well as prosper going forward. We do not know the where the economic world is headed, but we can most certainly count on continued regulatory burden and increasing operational costs throughout the years.
At the end of 2008 we were coming off a year in which the economies began to show weakness, rates dropped drastically, banks were being shut down by regulators, in all we had gone into the era known as the Great Recession. Pioneer Federal had made 233 total loans for $15.6 million in 2008, had $55 million in real estate loans on the books, $3.3 million in consumer loans, deposits in excess of $65 million, capital of $11.8 million and total assets of nearly $78.4 million.
Compare that to where we are now at year end 2016. Locally our economies have continued at a slow but steady pace, employment has stayed solid in Beaverhead County, although weaker in Powell County, notably the Title & Registration Bureau was moved from Deer Lodge to Helena in the fall of 2016. The University of Montana Western continues its growth breaking enrollment records almost every semester and continues to look for ways to stand above the rest winning several awards as an institution. Both the communities of Dillon and Deer Lodge have newer hospitals, of which both are doing well and serving the respective communities with the best of care. Agriculture prices have remained relatively low compared to the highs of 2014.
2016 was a solid year for Pioneer Federal Savings and Loan as your Association experienced asset growth from $95.2 million as of 12.31.15 to $97.6 million as of 12.31.16, a growth of $2.4 million (over 2.4%).
Association deposit balances grew $1.9 (over 2.3%) million to $81.1 million at year end from $79.2 million year end 2015. The deposit growth has come at a good time as loan growth has continued as well. The bulk of Pioneer’s deposits reside in IRAs, passbook savings, money market savings and interest bearing checking accounts. Depositors at Pioneer Federal Savings and Loan earned over $263,000 in interest in 2016. In the past 10 years, the Association has paid over $10 million in interest to our depositors. At year’s end 2016, Pioneer Federal had over 5800 open deposit accounts.
In 2016 lending was again solid with an increase over a good 2015. Over $15.1 million in new loans were made in 2016, which exceeds every year since 2009. Year end 2016 loan balances finished at just over $64 million on the books, an increase of just under $5 million from year end 2015. During the year 72 real estate loans paid off for a variety of reasons with 25 of those loans being internally refinanced by Pioneer Federal.
Pioneer Federal Savings and Loan Association’s capital position remains one of the strongest in MT (remember the average ratios for all mutual institutions and the OCC “well capitalized” figures mentioned on Page 1 of report). Our Tier 1 capital ratio as of December 31, 2016 was 16.23% of assets with a capital level of $15,836,000 as well as the total risk based capital ratio was 34.56%. The Association’s strong capital level positions us to handle ongoing market uncertainties both locally and nationally.
Other numbers from our 2016 operation include the following:
-the Association’s cost of funds at year end was .33% which is constant with the past couple years. Our number is higher than many of our competitors, however it has fallen from 3.13% at year-end 2007 to the present level. As a mutual, your association continues to try to reward customers with very competitive deposit rates appropriate with the times.
-the Association closed 172 new loans in 2016 of which 103 loans for over $9.9 million were made in the Dillon office and 69 loans for just over $5.2 million were made in the Deer Lodge office. The variation of loans made included: 89 residential real estate loans for $10.6 million; 72 consumer loans for $990,000; 6 non-residential loans for $3.4 million; and 5 commercial non real estate loans for $275,000. Since 2010 Pioneer Federal has made over 1,150 loans totaling over $81,400,000.00.
-asset quality continues to remain high with limited loan delinquencies and an investment portfolio consisting of highly rated investments. At year-end 2016, the Association had no Other Real Estate Owned (OREO) or foreclosed property on our books.
-Pioneer Federal has been involved in quality loan participations with other MT financial institutions. These participations make up just under 6% of our total loan balances and allow the Association to diversify our portfolio as well as put our excess deposits to work in quality loans. Management continues to monitor the loan portfolio for weaknesses and the Association maintains a healthy provision for loan losses for any potential exposure we might have with respect to economic downturns or problem loans.
-Pioneer Federal Savings and Loan Association and the Pioneer Federal Community Foundation, Inc. continue to financially support worthy projects and organizations located primarily in Powell and Beaverhead counties. In addition to supporting many local area events and organizations, during 2016 we continued to fund previous financial commitments made supporting UM-Western and hospitals in both Deer Lodge and Dillon. In the past 10 years alone, Pioneer Federal Savings and Loan and its Foundation have made cash contributions nearing $1,000,000 within our local communities.
-personnel worked closely with bank regulators and independent auditors. The Office of the Comptroller of the Currency (OCC), which is the Association’s primary regulator, did conduct on on-site examination in November 2016. We are prohibited by law to discuss specifics of our Examination results, but I can tell you we again received a most positive report. Also, our annual independent audit for year end 2016 was performed by Wipfli, as in years past the Association received a clean and unqualified audit. The auditors commended favorably on our efforts in building and maintaining a strong financial structure.
-usage of the Association’s electronic banking package continues to grow as more customers take advantage of mobile banking (specifically our phone app), the on-line services and debit cards. The mobile and technology trend is one the Association needs to keep pace with our peers as this is the direction not only the banking industry is headed, but also where the world in general is moving.
Other highlights included:
-the Dillon office again successfully hosted its annual community shred day which allowed area residents, at no cost, to dispose of their personal items via the commercial shredder utilized by the Association on a monthly basis. This continues to be very successful and is expected to continue into the future.
-the Deer Lodge office continued their long standing participation in the zero percent interest rate annual Christmas Cash loan program in the community.
Our successes in the compliance and regulatory areas are made possible in no small part to Pioneer Federal’s commitment to strong compliance, internal audit and fiscal reporting programs coupled with an emphasis on continued staff, management and Director training. Most all Association personnel and Directors attended one or more training sessions in order to stay on top of the latest industry trends, regulations and services.
Pioneer Federal Savings and Loan continued to get the most from our capable staff of 21 representing 19 FTEs. Hundreds years of service to Pioneer Federal are represented by our existing staff and Directors.
The financial success of 2016, like most years in our history, can be attributed in large part by our ability to control expenses. General and administrative expenses, which is all expenses incurred in daily operations except income taxes and interest expense, actually decreased slightly from year end 2016 in comparison to year end 2015. Controlling expenses going forward is critical for continued viability of Pioneer Federal and is most difficult in the face of regulatory demands and the need to reward an outstanding staff.
What may the future bring for Pioneer Federal Savings and Loan Association going forward? Pioneer Federal must remain true to our business beliefs and the local communities in which we serve, as well as work hard to retain and grow support of our local customer base. We are hopeful our economy continues on a moderate, sustained growth pace that can ensure financial health of local financial institutions, the communities we live in and the country. Due to regulation and the complexity of the industry we operate it can become more difficult each year to operate as a community oriented, traditional mutual thrift, so we must be flexible and adapt to changes for long term sustainability. As a community financial institution we are faced daily with operational, regulatory and economic risks and how we deal with these on an ongoing basis will define our continued success.
As members of Pioneer Federal Savings and Loan Association you should be very proud as we have a strong financial institution. We have well trained and qualified staff who are also involved in many organizations and projects within our communities not because they have to but simply because they want to be.
I would like to express sincere appreciation to our staff, the officers and our Directors for their continued effort and support on behalf of the Association. Please let me know any questions you may have about Pioneer Federal Savings and Loan Association.
Phillip K Willett
Executive Vice President
April 18, 2017