ANNUAL REPORT TO THE MEMBERS OF PIONEER FEDERAL SAVINGS AND LOAN ASSOCIATION
APRIL 16, 2019
This past year being my first year as President/CEO of Pioneer Federal Savings and Loan Association I felt we had a very successful 2018 and would like to give you a review of the 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 still operating in MT. 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. At Pioneer Federal we are 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.
While it may seem that the number of mutual banks is dwindling, and it certainly is, it is doing so at a slower rate than the banking industry as a whole. As of July 2018, mutual institutions represented 8.7% of all FDIC-Insured banks. That’s up from 8.2% ten years earlier.
The reason for this can be twofold:
1) traditionally mutual banks are more conservative and hold more capital. They are therefore less likely to fail than their counterparts. Since February 2007, over 525 financial institutions with over $800 billion in total assets have failed. Of those failed institutions, only 20 were mutual institutions with total assets of approximately $3 billion.
2) The desire to preserve the mutual charter and remaining mutual banks runs deep.
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 banks at the time primarily served retail and commercial business. Mutual savings 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 494 mutual savings banks located in 45 states with 20 mutual institutions operating in the Western United States, which includes: Idaho, Washington, Oregon, Montana, California, Nevada, Arizona, Colorado, Wyoming, Utah and the Dakotas. As of March 31, 2018, mutual banks had total assets of $374 billion. The median mutual bank had assets of $259.8 million.
Mutual banks are amongst the strongest in the country:
• In 2018 the average Tier 1 capital ratio (a barometer of capital strength and safety) for all mutual banks was 14.52% and the average risk-based capital ratio was 28.21%. The OCC considers a bank to be “well capitalized” (the 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%.
(More on Pioneer Federal’s capital figures later that will show our financial strength)
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 Association, 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 Association we help businesses start up and existing businesses 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.
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 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, a year in which the economy began to show weaknesses, 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 around $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 2018. Locally the economy surrounding our two locations has forged along at a rather slow pace, employment has remained solid in both Beaverhead and Powell counties, although somewhat weaker in Powell County. As of November 2018, the unemployment rates included: Powell County was at 3.8%, Beaverhead County was at 3.1% respectively, in comparison to the Montana state wide rate of 3.7%. Population figures for Beaverhead County reflect a 0.3% annual change from 2010-2017 while in Powell County the population has experienced a -0.5% annual change in the same period, Southwest MT has shown a 0.2% annual change and MT as a whole 0.9% annual change. Median household income in 2017 for Beaverhead County was $43,880, Powell County at $44,352 compared to the state of MT median of $50,801. The University of Montana Western continues to maintain solid enrollment figures and is constantly looking for ways to stand above the rest winning several awards as an institution. The communities of Dillon and Deer Lodge each 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, prices have remained lower compared to the highs of 2014.
2018 saw a step back as far as growth is concerned for Pioneer Federal Savings and Loan. As for lending, we face a variety of competitors in our markets both locally and regionally from larger institutions in larger neighboring communities. We face global competition from online companies such as Quicken Loans- as borrowers are drawn in by the “ease” of doing everything online. Deposit wise we see not only competition from our local and regional banks, but also from other areas of the financial sector, such as investment firms, as the battle for deposits created an increase in deposit rates making maintaining deposits very competitive. The association as of 12.31.17 had $96.5 million in assets and 12.31.18 assets stood at $89.6 million.
Association deposit balances went from $79.5 million at year end 2017 to $72.5 million at year end 2018. The deposit shrinkage mainly came from a few larger customers moving money from Passbook savings accounts to the “market”, as well as our IRA products have declined due to an aging customer base in both Deer Lodge and Dillon. Another factor is competition for Certificates of Deposit due to a change in the interest rate climate as we have seen several “CD specials” from local competitors who have locations throughout the state in which they need deposits to fund the growing lending needs in their larger markets of MT as well as investment firms are putting pressure on banks with the increased usage of higher paying brokered CDs. IRA balances decrease 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, and do not live in our market area, take the money to their own bank or investment firms to earn higher returns, which has become a concern to the whole banking industry. Other than the previously mentioned Passbook accounts the remainder of the Non-Maturing accounts stayed basically the same from YE 2017 to YE 2018. The bulk of Pioneer’s deposits reside in Non-Maturing deposits, which include Passbook savings, money market savings, and interest-bearing checking accounts, comprising $42.5 million of the $72+ million on deposit; Certificates of Deposit make up $17.7 million and IRAs $12 million. Depositors at Pioneer Federal Savings and Loan earned over $268,000 in interest in 2018. At year’s end 2018, Pioneer Federal had around 5700 open deposit accounts.
The Association made 132 new loans in 2018 for $12.1 million in dollar volume compared to 2017 in which 140 loans were made for $11.2 million. The average loan increased from $80,300 in 2017 to $91,600 in 2018. Dillon’s average loan was $113,500 and Deer Lodge’s average loan was $58,000. The total number of loans on the Association’s books at year end 2018 was 814. Year end 2018 loan balances finished at $63.0 million on the books compared to YE 2017 loan balances at $63.2 million on the books. During the year 57 loans paid off for a variety of reasons with 17 of those loans being internally refinanced by Pioneer Federal. The Association had a couple of larger loans pay off due to sales.
Pioneer Federal Savings and Loan Association’s capital position remains one of the strongest in MT. Our Tier 1 capital ratio as of December 31, 2018 was 18.73% of assets with a capital level of $16,700,000 as well as the total risk-based capital ratio of 38.45%. (see page 2 to compare our capital levels to our mutual peers) The Association’s strong capital level positions us to handle ongoing market uncertainties both locally and nationally.
Other numbers from our 2018 operation include the following:
-the Association’s cost of funds at year end was .46% which increased at the latter end of 2018, as I mentioned earlier the competition for deposits has increased a tremendous amount this past year, combined with periodic overnight borrowing with our partner- Federal Home Loan Bank of Des Moines, increased cost of funds to .46% from .33% in 2017. Our number is higher than some 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 time, so we try to remain on the high end of scale regarding the interest paid to our depositors.
-as previously mentioned the Association closed 132 new loans in 2018, of which 80 loans for $9.1 million were made in the Dillon office and 52 loans for $3.0 million in the Deer Lodge office. The 132 new loans included: 53 Residential Real Estate loans for $7,485,000; 63 Consumer loans for $1,032,000; 7 non-residential loans for $1,645,000; 9 commercial non- real estate loans for $1,930,000. Since 2010 Pioneer Federal has made 1,423 loans totaling approximately $105,000,000.
-asset quality continues to remain high with limited loan delinquencies and an investment portfolio consisting of highly rated investments. At year-end 2018, 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 over 5% of our total loan balances and allows the Association to diversify our loan portfolio. 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 2018 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. Also, the Association made a substantial donation to the Jaycee Park Renovation project in Dillon. In the past 10 years alone, Pioneer Federal Savings and Loan and its Foundation have made cash contributions over $1,000,000.00 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 conducted an on-site examination the end of April 2018. We received a positive report once again, with only minor areas to correct. The primary focus of the OCC in 2018 centered around the ever-changing world of Information Technology as they are making sure banks are keeping up in the cybersecurity world. Our annual independent audit for year end 2018 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, including e-statements, along with our phone app, the on-line services (such as online loan applications) and debit cards. The Association continues to provide financial education products for our customers on our website, as well as implementing online training to help prevent our customers avoid and/or recognize cyber hacking. The Association is in the process of joining MoneyPass ATM network to provide our customers access to surcharge free ATMs. MoneyPass is a surcharge free ATM network, of which there are over 30,000 ATMs located throughout the United States, where member banks’ card holders do not pay ATM surcharge fees when using a MoneyPass ATM. This perk for our customers will be up and running very soon. 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, 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 of years of service to Pioneer Federal are represented by our existing staff and Directors.
The financial success of 2018, 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, decreased for year 2018 in comparison to 2017, which helped Net Income in 2018 increase a tremendous amount in comparison to 2017. This 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 we must work hard to retain and grow support of our local customer base. Also, we need to look to expand our footprint in neighboring communities to allow us the opportunity for growth. We are hopeful our economy will maintain 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. Please let me know any questions you may have about Pioneer Federal Savings and Loan Association.
Phillip K Willett
April 16, 2019