ANNUAL REPORT TO THE MEMBERS OF
PIONEER FEDERAL SAVINGS AND LOAN ASSOCIATION
I was fortunate to prepare this report last year as the Executive Vice President and note this will be the first time in 30+ years anyone other than Tom has given the annual report as President/CEO. As you probably know 2017 saw the end of a tremendous run led by your longtime President/CEO Tom Welch. After 42 years of dedicated service to Pioneer Federal Tom decided it was time for him to move on to other interests, most importantly getting to spend a lot of quality time with his grandchildren. Pioneer Federal cannot thank Tom enough for all he has done for not only your Association, but also the communities of Deer Lodge and Dillon. With all that being said, I would like to give you a review of our past year as well as a sense of the coming year.
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 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 we know our customers because they are our neighbors.
Mutual Institutions are not growing in numbers each year, in fact mutual institution numbers are shrinking via mergers, conversion to stock banks, become commercial banks or by outright purchases by commercial banks. 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. Presently there are 499 mutual institutions operating in the United States as of year end 2017.
Mutual banks are amongst the strongest in the country:
• The median Tier 1 Capital ratio (a barometer of capital strength and safety) for all mutual banks was 12.35% and the average risk based capital ratio was 21.27%. Of mutual similar in size to Pioneer Federal ($50-$100M in Assets) those figures are 12.57% and 24.43%. 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%.
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 the years with innovations such as mobile banking on phones or tablets, where customers can make loan payments, transfer money, pay bills, remote deposit capture, person to person payments, etc. As a local community bank, not only do we need to be able to offer all the innovative services but also continue to help people buy their first cars or families to buy their first, second or even third homes. As a community bank we help businesses start up and existing businesses to expand. We help in bringing jobs and new opportunities to the communities we serve by channeling our loans to the neighborhoods where our depositors live and work.
Bank regulation has been a topic discussed over the years and really had come to the forefront with the implementation of Dodd-Frank. The current administration has been working diligently for fair regulations for community banks, such as Pioneer Federal, by pressing on with reforms most noticeably Senate Bill 2155, (the Economic Growth, Regulatory Relief and Consumer Protection Act)- introduced in late December 2017 and at the time of the Annual Report has passed the Senate on its way to the House. Senate Bill 2155 is the culmination of a multi-year effort to create regulation that is tiered to the size, risk, complexity, and business model of community banks. We will be following closely what comes to the forefront as far as other regulatory relief possibilities, obviously we know that regulation of the industry is needed, but the regulations must make sense for everyone. Over regulation can be as bad as too little regulation as 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. Regulatory compliance is expensive in terms of dollars and manpower so we hope the progress being made can help ease the burden on this front as well.
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 the 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 2017. Locally our economies have continued at a slow pace, employment has stayed solid in both Beaverhead and Powell counties, although somewhat weaker in Powell County. As of November 2017 the unemployment rates included: Powell County was at 4.4%, Beaverhead County was at 3.1% respectively, in comparison to the Montana state wide rate of 4.0%. 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. The communities of Dillon and Deer Lodge both have newer hospitals, of which both are doing well and serving the respective communities with the best of care. Both areas are Ag in nature and, although improving, prices have remained lower compared to the highs of 2014.
2017 saw a step back as far as growth is concerned for Pioneer Federal Savings and Loan. We face a variety of competitors in our markets both locally, regionally from larger institutions in larger neighboring communities as well as globally via the online competition- most notably companies such as Quicken Loans- as borrowers are drawn in by “ease” of doing everything online. Your Association experienced asset growth of $2.4 million from 12.31.15 to 12.31.16 to $97.6 million. The association as of 12.31.17 had $96.5 million in assets.
Association deposit balances went from $81.1 million at year’s end 2016 to $79.7 million at year end 2017. The deposit shrinkage comes mostly from our IRA products due an aging population in both Deer Lodge and Dillon. Either as people age they use up their IRA balances through disbursements or what we see more of is the next generation who inherits these IRAs take the money to investment firms to earn higher returns, which has become a concern to the banking industry as this is occurring industry wide. Pioneer’s IRA balances decreased by 13.1% from year end 2016 to year end 2017, however the passbook savings, money market and checking accounts increased by 4.8%, with the largest growth being in our core checking accounts. The bulk of Pioneer’s deposits reside in passbook savings, money market savings, certificates of deposit and interest-bearing checking accounts. Depositors at Pioneer Federal Savings and Loan earned over $263,000 in interest in 2017. At year’s end 2017, Pioneer Federal had around 5800 open deposit accounts.
Lending in 2017 was a decent year in comparison to other recent years, however was lower than 2016, which exceeded every year since 2009. Over $15.1 million in new loans were made in 2016, comparing that to 2017 in which $11.3 million in loans were made. The total number of loans on the Association’s books at year end is 820. Year end 2017 loan balances finished at $63.2 million on the books, a decrease of just under $1 million from year end 2016. During the year 67 loans paid off for a variety of reasons with 17 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 2 of report). Our Tier 1 capital ratio as of December 31, 2017 was 16.80% of assets with a capital level of $16,200,000 as well as the total risk based capital ratio was 36.29%. The Association’s strong capital level positions us to handle ongoing market uncertainties both locally and nationally.
Other numbers from our 2017 operation include the following:
-the Association’s cost of funds at year end was .33% which has remained 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 140 new loans in 2017, of which 83 loans for $8.6 million were made in the Dillon office and 57 loans for $2.7 million in the Deer Lodge office. The 140 new loans included: 66 Residential Real Estate loans for over $8.3 million; 64 Consumer loans for $614,000; 4 non-residential loans for $562,000; 5 commercial non- real estate loans for $1,735,000. Since 2010 Pioneer Federal has made over 1,290 loans totaling over $92.8 million.
-asset quality continues to remain high with limited loan delinquencies and an investment portfolio consisting of highly rated investments. At year-end 2017, 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 approximately 5.8% 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 2017 we continued to fund previous financial commitments made supporting UM-Western and hospitals in both communities as well as the Rialto theater in Deer Lodge. 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, will conduct on on-site examination the end of April 2018. We expect to receive a positive report once again. Our annual independent audit for year end 2017 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, along with 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 monthly. This continues to be very successful and is expected to continue.
-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 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. As mentioned previously the end of 2017 saw the end of era with long time CEO Tom Welch retiring and the staff will work diligently to continue a strong association that has been so well maintained under Tom’s direction.
The financial success of 2017, 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, stayed basically static from year end 2017 compared to year end 2016, which is a tribute to our staff as we all know most everything is increasing in price. 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 as indicated in our MISSION STATEMENT: Pioneer Federal Savings and Loan Association is dedicated to providing quality services and products to its customers all the while remaining financially strong and adding value to the quality of life to the communities it serves. We must remain true to 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 will continue on with 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.
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. I personally would also like to thank the staff and directors for support in making it as easy as possible in a transition period for the Association. Please let me know any questions you may have about Pioneer Federal Savings and Loan Association.
Phillip K Willett
April 17, 2018