Rainier Pacific Financial Group 10-K 2008
Documents found in this filing:
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. YES NO X
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X
The aggregate market value of the Common Stock outstanding held by nonaffiliates of the Registrant based on the closing sales price of the Registrant’s Common Stock as quoted on The Nasdaq Stock Market LLC on June 30, 2007 was $98,724,388 (5,706,612 shares at $17.30 per share). For purposes of this calculation, common stock held only by executive officers and directors of the Registrant is considered to be held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders (Part III).
RAINIER PACIFIC FINANCIAL GROUP, INC.
2007 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
The Company posts its annual report to shareholders, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and press releases on its investor information page at www.rainierpac.com. These reports are posted as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission ("SEC"). All of the Company’s SEC filings are also available free of charge at the SEC's website at www.sec.gov or by calling the SEC at 1-800-SEC-0330.
Item 1. Business
Rainier Pacific Financial Group, Inc. ("Rainier Pacific Financial Group" or the "Company"), a Washington corporation, was organized on May 23, 2003 for the purpose of becoming the holding company for Rainier Pacific Savings Bank ("Rainier Pacific Bank" or the "Bank") upon the Bank's conversion from a mutual to a stock savings bank ("Conversion"). The Conversion was completed on October 20, 2003 through the sale and issuance of 8,442,840 shares of common stock by the Company. At December 31, 2007, we had total assets of $878.9 million, total deposits of $461.5 million and total shareholders' equity of $86.8 million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank.
The Bank is a well-established financial institution with a 75 year history of meeting the financial needs of its customers, who are primarily located in our local markets of Tacoma-Pierce County and the City of Federal Way in Washington State. We offer consumers a broad array of deposit and loan services through Rainier Pacific Bank and offer automobile and homeowners' insurance, financial planning, and non-federally insured mutual fund and investment services through two operating units of the Bank doing business as Rainier Pacific Insurance Services and Rainier Pacific Financial Services. We also provide deposit and loan services to small businesses, and local builders of single-family residential homes in our local community. Our customers’ deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable legal limits. Our primary regulators are the Washington State Department of Financial Institutions and the FDIC.
We began operations as a credit union in 1932, when we were formed as Tacoma Teachers Credit Union to serve the financial needs of Tacoma School District employees. In 1973, the Credit Union's name was changed to Educational Employees Credit Union, and we expanded our field of membership to encompass all employees in the field of education within the greater Tacoma and Pierce County area. The membership base was further expanded in 1988 by a merger with Health Care Credit Union which extended membership eligibility to all health care employees in Pierce County.
During 1993, 1994 and 1995, we obtained approval from the State of Washington's Department of Financial Institutions to extend credit union membership eligibility to all residents and employees of businesses in most communities in the Tacoma-Pierce County and City of Federal Way (in King County) geographical market. On October 16, 1995, we changed our name to Rainier Pacific, A Community Credit Union to reflect our change from an employer-based credit union to an inclusive community-based financial services provider.
On January 1, 2001, we converted from a credit union to a state-chartered mutual savings bank. The savings bank charter afforded us the opportunity to expand our offering of residential mortgage loans, multi-family and commercial real estate loans, real estate construction and land loans, and the ability to more broadly offer small business banking services. In addition, this savings bank charter enabled the expansion of our property and casualty insurance services beyond that available under our credit union charter.
On October 20, 2003, we completed our conversion from a state-chartered mutual savings bank to a state-chartered stock savings bank. In connection with the conversion, the Company sold 7,935,000 shares of its common stock and received $77.4 million in net proceeds after deducting expenses, and issued an additional 507,840 shares to the Rainier Pacific Foundation, a private foundation focused on supporting educational, healthcare, and community development services in our local markets. Since the completion of our conversion through December 31, 2007, the Company has repurchased 2,304,107 shares of its common stock.
As of December 31, 2007, the Company and the Bank operated a retail network of 14 branches throughout the Tacoma-Pierce County market and the City of Federal Way, with its corporate office located in the central business district of downtown Tacoma.
We focus our efforts on serving residents and businesses in Pierce County and the City of Federal Way. Pierce County is the second most populous metropolitan area in Washington State, covering 1,794 square miles, with approximately 772,000 residents, a median household income of approximately $53,500 and an average household income of $66,100. The City of Federal Way is located in South King County, just north of the Pierce County border, with a population of approximately 81,000, a median household income of approximately $52,000, and an average household income of $64,500.
Our local economy possesses a blend of regional, national and international economic factors. The local economy has changed from an economy dependent upon aerospace, manufacturing, and natural resources, to one that is more focused on the service industry and international trade. The professional and technical service sectors today represent approximately 30% of the jobs in Pierce County, up from 15% ten years ago.
Since 2003, the local economy has experienced a sustained recovery and has been relatively strong compared to the rest of the nation. The Pierce County unemployment rate, which was among the highest in the country in 2003 at 6.9%, declined to 4.8% in 2007.
The local economy is expected to continue to benefit by the strength of the global economy as import/export activity continues to expand, and as growth in the high technology and health care sectors accelerate. The ports of Tacoma and Seattle are among the fastest growing ports with capacity for future growth on the west coast of the United States in terms of container volume. The presence of Fort Lewis Army Base and McChord Air Force Base, with planned expansion of their facilities and expected growth in the number of civilians and military employees, also provides additional stability for our local economy. Population growth has averaged 2.2% per year during the past decade supporting the housing market. Residential housing values were stable in the Pierce County market, with a median home price of $275,000 in December 2007, which were relatively unchanged on an annual basis. Home sales, however, slowed appreciably in 2007 and were 27% lower compared to 2006. Apartment vacancies remained low as rates were below 5% for the Puget Sound region, with vacancies for office properties at 7.3% at year-end 2007.
The City of Tacoma continues to experience strong revitalization of its downtown central business district with the addition of the Museum of Glass, the Tacoma Art Museum, a new convention center, a new hotel, new restaurants, new residential housing, and the continued expansion of the University of Washington Tacoma campus. In addition, numerous additional residential and commercial development projects are planned over the next five to ten years in the central business district.
We provide a high level of convenient access for our customers in a variety of ways, having adopted an integrated "bricks, clicks and mortar" delivery systems strategy within a community financial institution setting. This strategy focuses on giving consumers integrated, yet flexible, options and choices as to how they wish to transact business with us. Therefore, we focus upon developing each of the delivery systems within the three elements of our "bricks, clicks, and mortar" strategy. Our three-pronged delivery systems strategy allows customers to decide how they want to access our services through an appropriate blend of high-touch and high-tech service.
The "bricks" element of our strategy relates specifically to the branch facilities where in-person interactions occur. As a local community-based financial institution, we are committed to providing a network of branch offices that enables consumers to access services in person, within 15 minutes from essentially anywhere in Pierce County or the City of Federal Way. As of December 31, 2007, our retail network consisted of 11 branches in Pierce County
and three branches in the City of Federal Way. Our branch office hours are 9:00 a.m. to 5:30 p.m. Monday through Thursday, 9:00 a.m. to 6:00 p.m. on Fridays, and 9:00 a.m. to 3:00 p.m. on Saturdays.
The core components of the "clicks" element of our delivery channel strategy are internet banking and automated teller machines, along with automatic payment vehicles and debit and credit card services. We have expanded our on-line banking capabilities to enable customers to perform essentially any type of transaction that can be conducted in a branch setting, such as review account balances and statements, make funds transfers, apply for a mortgage or consumer loan, and even pay bills. To accommodate 24 hour, seven day a week availability to cash, we provide automated teller machines at each of our 14 full-service branch offices and an additional eight stand-alone automated teller machines throughout Pierce County.
The "mortar" element of our "bricks, clicks and mortar" strategy is our Call Center. The Call Center completes what we need to provide an integrated delivery solution for our customers. We continue to focus on improving the speed in which all telephone calls are answered, the level of customer service provided, and the ability to handle virtually all of our customers' banking requests over the phone. In addition to the employee-staffed Call Center that is available to customers during the week from 7:00 a.m. to 7:00 p.m. weekdays, and 9:00 a.m. to 3:00 p.m. on Saturdays, we also provide 24-hour, seven days a week telephone banking through an automated voice response system.
General.> We focus our lending activities primarily on generating five or more family residential (“multi-family”) and commercial real estate loans, real estate construction and land loans, loans secured by owner occupied one- to four-family residences, consumer loans and commercial loans for small businesses. We offer a wide variety of secured and unsecured consumer loan products, including direct and indirect auto loans, deposit secured loans, unsecured personal loans, VISA lines of credit, and home equity loans and lines of credit. We focus on originating multi-family and commercial real estate loans on properties located primarily in the Puget Sound region of Western Washington. In September 2002, we began offering real estate construction and land loans on single-family residential properties to consumers and local builders. In January 2005, we introduced small business banking services, originating a blend of unsecured and secured lines/loans and owner-occupied real estate loans. As of December 31, 2007, the loan portfolio totaled $637.0 million and represented 72.5% of our total assets. As of December 31, 2007, the loan portfolio was comprised of 33.4% commercial real estate loans, 23.4% multi-family real estate loans, 15.2% consumer loans (including our VISA credit card portfolio and home equity loans), 12.4% real estate construction and land loans, 12.1% one- to four-family home loans, and 3.6% commercial business loans.
Our loan policy limits the maximum amount of loans that we can lend to any one borrower to 15% of the Bank's capital. As of December 31, 2007, the policy limit amounted to $12.9 million. The loans outstanding to our five largest borrowing relationships as of December 31, 2007 were comprised of multi-family, commercial real estate, and real estate construction and land loans. The largest single borrower relationship is for $12.1 million, comprised of ten loans which are made to limited liability companies for multi-family properties located in King and Pierce counties. The second largest borrower relationship involved a construction company representing four loans totaling $11.8 million, secured primarily by properties located in Pierce County. The third largest borrower relationship totaling $10.7 million involves two loans to limited liability companies secured by real estate land development and multi-family properties located in King County. The fourth largest borrower relationship totals $10.6 million and involves four loans to four separate limited liability companies. One of these loans is secured by an office building, and the other three loans are for residential construction and land acquisition and development projects. The fifth largest borrower is a limited liability company with aggregate loans of $9.6 million, comprised of one loan for a multi-family property located in King County. All of the loans mentioned above have personal guarantees in place as an additional source of repayment, including those made to partnerships and corporations. All of the properties securing the loans discussed above were in the Puget Sound region and were performing according to their terms as of December 31, 2007.
Lending authorities are established under the guidelines provided by the Board of Directors. The President/CEO, or his designee, establishes individual loan authorities and limits. In some instances, two or more individuals combined can approve a higher loan amount than their individual loan limits. Loan authorities are categorized by various loan types, such as: (1) consumer, (2) residential real estate mortgages, (3) multi-family and commercial real estate, (4) real estate construction and land loans, and (5) commercial and industrial loans. Loans in excess of the individual or combined lending limits, generally in excess of $750,000 aggregate, are approved by the Management Loan Committee, which consists of the President/CEO, Senior Vice President, Vice President/Chief Lending Officer, Vice President Business Banking, and the Real Estate Loan Manager. Loans in excess of $5.0 million, individual or aggregate, are approved by the Loan and Investment Committee, comprised of members of the Board of Directors.
Subject to market conditions, we plan to continue to concentrate on originating multi-family and commercial real estate loans and real estate construction and land loans within the Puget Sound region in Washington State. We will also continue to pursue the expansion of our small business lending activities which involve greater risks of default and delinquency than other types of lending that we have historically engaged in.
Loan Portfolio Analysis.> The following table sets forth the composition of Rainier Pacific Bank's loan portfolio by type of loan at the dates indicated.
The following table shows the composition of Rainier Pacific Bank's loan portfolio by fixed- and adjustable-rate loans at the dates indicated.
Residential One- to Four-Family Lending.> As of December 31, 2007, $76.9 million, or 12.1% of our total loan portfolio consisted of loans secured by one- to four-family residences.
Our residential first mortgages are generally originated in accordance with guidelines established by Freddie Mac and Fannie Mae, except in certain circumstances such as our community development loans to low or moderate income borrowers. All of our one- to four-family residential mortgage loans, whether fixed or adjustable, require both monthly principal and interest payments and have no prepayment penalties. We have not originated or have in our loan portfolio any option ARMs, subprime, or single-family mortgage loans with more than a 30-year final maturity term.
Most of our residential loan originations are in connection with the refinance of an existing loan rather than the purchase of a home, and most of these customers prefer fixed rather than adjustable rate loans. We originated $32.1 million of fixed-rate one- to four-family residential loans and did not originate any adjustable rate one-to-four family residential loans during fiscal 2007. Residential mortgage loans are primarily made on owner-occupied properties within the Pierce and South King County markets. As of December 31, 2007, $70.0 million, or 91.1%, of our one- to four-family residential mortgage loan portfolio was comprised of fixed-rate loans.
As of December 31, 2007, we had $6.9 million, or 8.9% of our one- to four-family loans in adjustable-rate mortgages. The adjustable-rate mortgage products generally are underwritten to be saleable in the secondary market. The adjustable-rate mortgage products adjust annually after an initial fixed interest rate period ranging from one to ten years. Contractual annual adjustments generally are limited to increases or decreases of no more than 2%, subject to a maximum increase of no more than 6% from the initial interest rate. At the time of rate adjustment, the loan rate is usually modified to reflect the average yield on U.S. Treasury securities adjusted to a constant maturity of one year Treasury securities plus a margin of 2.5% to 2.875%. Borrower demand for adjustable-rate mortgage loans versus fixed-rate mortgage loans is primarily related to the interest rate environment and the anticipated changes in the interest rate over time, as well as the fees being charged on mortgage products within the market.
We have offered a fixed-rate ten-year term mortgage loan program since 1993 and introduced a fixed-rate seven-year program in November 2003 on owner-occupied one- to four-family residential properties. These loans are an attractive alternative to borrowers with lower loan amount needs and a greater level of equity in their homes. These loans are written consistent with secondary market standards and have an average loan balance of $43,580 with an average loan-to-value ratio of less than 25%. As of December 31, 2007, we had $9.4 million, or 12.2% of the fixed one- to four-family residential loan portfolio in seven- and ten-year mortgage products. We also offer special community development loans to low to moderate income borrowers at a loan-to-value ratio of up to 100%. As of December 31, 2007, we had $4.4 million in special community development loans in our residential loan portfolio. All loans under these special loan programs were performing in accordance with their terms as of December 31, 2007.
We originate a limited number of jumbo fixed- and adjustable-rate single-family loans that we retain for our portfolio. Jumbo loans have balances that are greater than $417,000. The jumbo loan portfolio, comprised of seven loans, totaled $4.3 million as of December 31, 2007. The loans in this portfolio have been generally priced at rates of 0.25% to 0.75% higher than the standard secondary market rates on conventional loans. As of December 31, 2007, all loans in the jumbo loan portfolio were performing in accordance with their terms.
Our fixed-rate, single-family residential mortgage loans are predominantly originated with 15 to 30 year terms, although these loans typically remain outstanding for substantially shorter periods. In addition, substantially all residential mortgage loans in our loan portfolio contain due-on-sale clauses providing that we declare the unpaid amount due and payable upon the sale of the property securing the loan. Typically, we enforce these due-on-sale clauses to the extent permitted by law and as a standard course of business. The average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.
Our lending policies generally limit the maximum loan-to-value ratio on mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or the purchase price. We usually obtain private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the secured property. The maximum loan-to-value ratio on mortgage loans secured by non-owner occupied properties is generally 70% on purchases and up to 80% on no cash out refinances for loans originated for sale in the secondary market to Freddie Mac. Properties securing our one- to four-family loans are appraised by independent appraisers approved by us. We require the borrowers to obtain title, hazard, and, if necessary, flood insurance. We generally do not require earthquake insurance because of competitive market factors.
Multi-Family and Commercial Real Estate Lending.> We have originated multi-family and commercial real estate loans since November 1995. Loans are underwritten by designated lending staff or the respective loan committee depending on the size of the loan. As of December 31, 2007, $362.0 million, or 56.8% of our total loan portfolio was secured by multi-family and commercial real estate property.
We actively pursue multi-family and commercial real estate loans located in the Puget Sound region of Washington State. Commercial and multi-family real estate loans include investment or owner-occupied office and medical buildings, retail shopping centers, mini-storage facilities, warehouse facilities, and apartment buildings and complexes. Multi-family and commercial real estate loans contain a higher risk of default and loss than one- to four-family residential loans, particularly if the local economy experiences a downturn and because these loans generally are priced at a higher rate of interest than one- to four-family residential loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a higher degree of risk than one- to four-family residential loans. Payments on loans secured by multi-family or commercial properties are usually dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally obtain loan guarantees from financially capable parties as determined by our review of personal financial statements. If the borrower is a corporation, we generally obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports.
The average size loan in our multi-family and commercial real estate loan portfolios was $1.5 million as of December 31, 2007. These loans are primarily secured by properties located in the Puget Sound region of Western Washington. As of that date, $212.9 million, or 33.4% of our total loan portfolio was secured by commercial real estate properties while $149.1 million, or 23.4% of our total loan portfolio was secured by multi-family dwellings in our market area. We target individual multi-family and commercial real estate loans between $500,000 and $5.0 million; however, by policy we can originate loans to one borrower up to 15% of the Bank's capital. The largest non-residential commercial real estate loan as of December 31, 2007 was an $8.7 million loan secured by an industrial business park located in Thurston County, Washington. The largest multi-family loan as of December 31, 2007 was a $9.6 million loan secured by a 46-unit residential apartment building located in King County, Washington. Both of these loans were performing according to their loan terms, as were all of our multi-family and commercial real estate loans as of December 31, 2007.
We offer both fixed- and adjustable-rate loan options on multi-family and commercial real estate loans. Loans originated on a fixed-rate basis generally are originated with final maturities up to ten years, and with amortization terms up to 30 years. Interest rates on fixed-rate loans are generally established utilizing the Federal Home Loan Bank of Seattle's advance rate for an equivalent period plus a margin ranging from 1.50% to 2.50%, depending upon the prepayment penalty option selected by the borrower. We have established floor rates on these loans, although from time to time we may offer promotional rates below the established floor rates. As of December 31, 2007, we had $26.3 million of fixed-rate multi-family loans and $113.7 million of fixed-rate commercial real estate loans.
Adjustable-rate multi-family and commercial real estate loans are originated with variable rates that generally adjust after an initial fixed-rate period ranging from three to five years. Contractual annual adjustments predominantly have a 1.50% maximum annual rate increase and are generally subject to a lifetime cap rate of 13.0%. These loans have been originated with floor rates of 5.0% to 7.75%. Adjustable-rate multi-family and commercial
real estate loans are generally priced utilizing the 11th District Cost of Funds Index plus a margin of 3.00% to 3.50%, with principal and interest payments fully amortizing over terms up to 30 years, and anaccompanying prepayment penalty. As of December 31, 2007, we had $122.8 million in adjustable-rate multi-family loans and $99.2 million in adjustable-rate commercial real estate loans inclusive of owner occupied loans. Both adjustable-rate mortgages and fixed-rate mortgages contain provisions for the assumption of the loan by another borrower, subject to our approval and a 1% assumption fee.
The maximum loan-to-value ratio for multi-family loans is generally 80% of appraised value on purchases and 75% of appraised value on refinances. The maximum loan-to-value ratio for commercial real estate loans is generally 75% of appraised value for both purchases and refinances. We require appraisals of all properties securing multi-family and commercial real estate loans. Appraisals are performed by independent appraisers approved by us. We require our multi-family and commercial real estate loan borrowers with outstanding balances in excess of $500,000 to submit annual financial statements and rent rolls on the subject property. We also inspect the subject property at least once every two years if the loan balance exceeds $500,000. We generally require a minimum pro forma debt coverage ratio of 1.20 times for loans secured by multi-family and commercial properties.
Real Estate Construction and Land Loans.> As of December 31, 2007, real estate construction and land loans represented $78.8 million, or 12.4% of our total loan portfolio. We began originating real estate construction and land loans in September 2002 and have focused our efforts primarily in the Pierce, Thurston, and King County market areas with custom residential construction all-in-one, residential speculative construction, single-family land acquisition and development, and lot inventory loans. The custom residential construction all-in-one loans are priced in accordance with the terms and conditions available in the secondary market for this product and are underwritten to be saleable in the secondary market upon completion of the home. Other construction loan programs will be originated with terms up to 18 months, with a variable interest rate tied to the prime rate as published in The Wall Street Journal, plus a margin ranging from 0.50% to 1.75%, with a loan-to-value ratio that is generally no more than 80% of the appraised value of the property at completion.
Our construction loans to individuals to build their personal residences typically are structured as construction/permanent loans whereby there is one closing for both the construction loan and the permanent financing. During the construction phase, which typically lasts for six months, our construction loan officers or an approved fee inspector makes periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made in eight draws during the construction period. Construction loans require payment of interest only during the construction phase and are structured to be converted to fixed-rate permanent loans at the end of the construction phase. Prior to making a commitment to fund a construction loan, we require an appraisal of the property by an independent appraiser.
During the year ended December 31, 2007, we originated $85.8 million of short-term land development, lot inventory, and construction loans to 22 experienced local builders and developers to fund the construction of primarily one- to four-family residential properties primarily for homes within the price range of $200,000 to $600,000. Most loans are written with maturities of 12 to 24 months, have interest rates that are tied to the prime rate plus a margin, and are subject to rate adjustment with the movement of the prime rate. All builder/borrowers are underwritten to pre-established standards that include established cash reserves to carry projects through completion and sale of the project. The maximum loan-to-value ratio on both pre-sold and speculative projects is generally 80% or less. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved inspectors warrant. Although there were no default or foreclosure actions involving land or construction loans during the year ended December 31, 2007 and all land and construction loans were performing according to their terms, two of our smaller builders submitted deeds in lieu of foreclosure for three completed homes and one lot in late January 2008.
At December 31, 2007, our largest construction and land development loan was a land development loan that had an outstanding principal balance of $8.9 million and was secured by a first mortgage lien. This loan was performing according to its original terms at December 31, 2007. At December 31, 2007, the average outstanding principal balance of land development loans to contractors and developers was $2.5 million.
We also make construction loans for commercial development projects. As of December 31, 2007, we had $5.7 million of loans outstanding for these types of projects. These projects include multi-family, apartment, retail, office/warehouse and office buildings. These loans generally have an interest-only phase during construction, and generally convert to permanent financing when construction is completed. Disbursement of funds is at our discretion and is based on the progress of construction. The maximum loan-to-value limit applicable to these loans is 75% of the as-completed appraised value.
We originate land loans to local contractors and developers for the purpose of holding the land for future development. As of December 31, 2007, we had $42.8 million of loans outstanding for residential land or lot projects. These loans are secured by a first lien on the property, are limited to 75% of the discounted appraised value of the land, and generally have a term of up to 24 months with a variable interest rate tied to the prime rate as published in The Wall Street Journal plus a margin. Our land loans are generally secured by property in our primary market area. We require title insurance and, if applicable, a hazardous waste survey reporting that the land is free of hazardous or toxic waste.
Although construction lending affords us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than one- to four-family mortgage lending, construction lending is considered to involve a higher degree of risk. It is more difficult to evaluate construction loans than permanent loans. As of December 31, 2007, we had $30.3 million of loans outstanding for residential construction projects. At the time the loan is made, the value of the collateral securing the loan must be estimated based on the projected selling price at the time the residence is completed, typically six to 12 months later, and on estimated building and other costs (including interest costs). Changes in the demand for new housing in the area and higher than anticipated building costs may cause actual results to vary significantly from those estimated. Accordingly, we may be confronted, at the time the residence is completed, with a loan balance exceeding the value of the collateral. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for new housing. The fact that homes under construction are often difficult to sell and typically must be completed in order to be successfully sold also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete the residence. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished home.
We attempt to minimize the foregoing risks by, among other things, limiting our construction lending to properties located primarily in Pierce, Thurston or King Counties, and limiting our speculative loans to a small number of experienced local builders. All of our land development, lot inventory, and construction loans were performing in accordance with their terms as of December 31, 2007.
New home sales slowed appreciably in our local market area and were 27% lower in 2007 compared to 2006. The unsold inventory of newly constructed homes has increased causing many builders and developers to reduce their offering prices and also causing lot prices to decline in value as inventory of unsold homes increased to 9.5 months and 5.7 months in Pierce and Thurston Counties, respectively, as of December 31, 2007, indicating a market that favors buyers as opposed to sellers.
Consumer Lending. >Consumer loans entail greater risk than one- to four-family residential loans, particularly in the case of unsecured or loans secured by assets that decline in value over time. Therefore, interest rates on these loans are generally higher than residential real estate loans. In the event of default on a secured consumer loan, any repossessed collateral may not provide an adequate source of repayment of the outstanding balance as a result of the assets' decline in value over time, damage or loss. Often, the remaining deficiency balance does not warrant further substantial collection efforts against the borrower beyond sending the account to an outside collection agency, as these borrowers often file bankruptcy once the collateral has been repossessed. Consumer loan collections depend on the borrower's financial stability, and may be adversely impacted by job loss, divorce,
personal bankruptcy, or medical issues. Various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Our consumer installment loans, such as auto, boats, recreational, home equity and personal loans, are generally offered on a fixed-rate basis, while our VISA, unsecured personal lines of credit, and home equity lines of credit are principally offered on a variable rate basis. Our installment loans are offered using a risk-based pricing model based upon the creditworthiness of the customer and the available collateral. Our consumer lending programs do not specifically target borrowers with lower credit scores, however, they do allow for the underwriting of loans to individuals with negative credit information under certain defined guidelines. Management routinely monitors all loan programs and underwriting is adjusted when there is evidence of deterioration in individual consumer lending portfolios. Interest rates are offered on a multi-tiered basis, with the best "A" credits receiving the lowest loan rates. Loans made to borrowers with lower credit scores have a higher likelihood of becoming delinquent or defaulting on their loans, and therefore generally receive a higher interest rate. As of December 31, 2007, our consumer loans, including our home equity line/loan portfolio, totaled $96.7 million, or 15.2% of our total loan portfolio.
The home equity loan portfolio was the largest component of the consumer loan portfolio as of December 31, 2007 totaling $45.3 million, or 7.1% of our total loan portfolio. These loans include both adjustable-rate lines of credit and fixed-rate loan products. These loans are made on owner-occupied properties. The loan-to-value ratio is generally 90% or less, when taking into account both the first and the second mortgage loans, although it can be as high as 110% in some cases. Home equity loans generally carry fixed interest rates with a fixed payment over a term up to 15 years. Home equity lines of credit allow for a ten year draw period, which is renewable, and the interest rate is tied to the prime rate as published in The Wall Street Journal, plus or minus a margin.
The VISA credit card portfolio was the second largest component of our consumer loan portfolio totaling $23.2 million, or 3.6% of our total loan portfolio at December 31, 2007. We have been offering credit cards for more than 20 years and offer over 15 credit card products, the majority of which are on an adjustable-rate basis, with the interest rate tied to prime rate as published in The Wall Street Journal, plus a margin. Interest rates and credit limits are determined based upon product type and creditworthiness of the borrower. We use credit bureau scores, in addition to other criteria such as income, in our underwriting decision process on these loans.
As of December 31, 2007, the third largest component of the consumer portfolio was our auto loan portfolio totaling $20.8 million, or 3.3% of our total loan portfolio. This loan portfolio is primarily comprised of loans with terms up to seven years. We have offered indirect auto loans since 1994 and at December 31, 2007 the loans originated through our indirect dealer program were $18.6 million, or 89.5% of our total auto loan portfolio. These loans consist primarily of indirect auto loans and to a much lesser extent include indirect loans on recreational vehicles and boats. The majority of these loans have been originated through approximately 25 dealers located in our market area.
The interest rate charged to an indirect loan borrower is generally one to two percentage points higher than the "buy rate" or the rate we earn. The difference between the two rates is referred to as the "spread." At loan inception, we pay a portion of the dollar value of the spread over the contractual term of the loan to the auto dealer in accordance with the established loan programs, or in some cases, we pay flat origination fees to dealers on loans without a rate spread. Dealers are required to reimburse us for the amount paid to them if the loan pays off or the vehicle is repossessed within 90 days from the date of funding. Dealers are billed monthly for any interest spread or origination fee reimbursements and are given ten days after billing to pay us. In the event we are not reimbursed within ten days, the amount owed to us is deducted from the next payment we make to the dealer.
Borrowers may be more likely to become delinquent on an automobile loan than on a residential mortgage loan secured by their primary residence. Moreover, automobiles depreciate rapidly and in the event of default, principal loss as a percent of the loan balance depends upon several factors, such as the mileage and condition of the vehicle at the time of repossession, over which we have no control. In 2007, we significantly curtailed our origination of indirect auto loans and implemented more stringent underwriting standards in response to increasing price competition and compression of risk-adjusted profit margins in this line of business. As a result, new indirect
auto loan originations totaled $3.0 million in 2007, compared to $10.4 million in 2006 and $10.5 million in 2005. Effective February 1, 2008, we no longer originate indirect auto loans.
Commercial Business Lending>. At December 31, 2007, we had $22.7 million, or 3.6% of our total loan portfolio in commercial business loans. Of the $22.7 million, $15.4 million is secured by equipment, receivables, or other assets, while the remaining $7.3 million is unsecured. Prior to 2004, we provided commercial business loans only on an accommodative basis to businesses owned by our retail customers. In 2004, we hired an experienced banking executive with 30 years of commercial banking experience to lead our business banking program, which officially commenced in March 2005. We intend to increase our commercial lending activities to take advantage of local lending opportunities in extending credit to small- and medium-sized businesses, to provide for potentially higher asset yields, and to position Rainier Pacific Bank as a full-service financial institution.
Commercial business lending generally involves risks that are different from, and often greater than, those associated with residential, commercial and multi-family real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans often have equipment, inventory, accounts receivable or other business assets as collateral, the liquidation of collateral in the event of a borrower default is often not a sufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
As a relatively new program, our ability to originate commercial business loans is highly dependent upon favorable market conditions and our ability to hire qualified commercial banking personnel. Accordingly, there can be no assurance that we will continue to be successful in these efforts.
Loan Maturity and Repricing>. The following table sets forth certain information at December 31, 2007 regarding the dollar amount of loans maturing in Rainier Pacific Bank's portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
The following table sets forth the dollar amount of all loans due one year or more after December 31, 2007, which have fixed interest rates, and which have floating or adjustable interest rates.
Loan Solicitation and Processing. >The majority of the one- to four-family residential mortgage and consumer loan originations are generated through our retail branch network. We originate multi-family and commercial real estate loans using income property loan officers employed by us. In addition, approximately 20% of our multi-family and commercial real estate loans have been originated by an outside broker and underwritten by us within our policies and guidelines. Construction loans are generated by construction loan officers who work for us. Business loans are generally originated by our business banking officers, and approved by designated underwriters for this type of lending.
Upon receipt of a loan application from a prospective borrower, we obtain a credit report and other data to verify specific information relating to the loan applicant's employment, income, and credit standing. All real estate loans requiring an appraisal are done by an independent appraiser. All appraisers are approved by us, and their credentials are reviewed annually, as is the quality of their appraisals.
We use a multi-tier lending matrix depending on the type and size of the consumer credit to be approved. We approve loans based upon automated approvals, individual lending authorities, joint lending authorities, management loan committee authority, and the lending authority of the loan and investment committee of the Bank’s board of directors.
We require title insurance on all real estate loans. In addition, property and casualty insurance is required on all secured loans in excess of $2,500.
Loan Originations, Servicing, Purchases and Sales. >Home equity lines of credit and loans, as well as our consumer loans, are originated utilizing an in-house system and are underwritten through either an automated decision matrix or by designated underwriting staff depending upon the size of the loan. These loans are also serviced on an in-house loan servicing system.
One- to four-family residential loans are generally originated in accordance with the guidelines established by Freddie Mac and Fannie Mae, with the exception of seven- and ten-year fixed-rate mortgage loans and our special community development loans. We originate residential first mortgages and service them using an in-house mortgage system. We utilize the Freddie Mac Loan Prospector Automated Loan System to underwrite approximately 95% of our residential first mortgage loans (excluding our seven- and ten-year loans and community development loans). The remaining loans are underwritten internally by designated real estate loan underwriters in accordance with standards as established by management.
We also sell residential first mortgage loans to the secondary market. Our primary secondary market relationship has been with Freddie Mac. We also maintained secondary market relationships with Fannie Mae and previously with the Federal Home Loan Bank of Seattle, prior to their discontinuation of their mortgage purchase program in 2005, and generally retain the servicing on all loans sold into the secondary market. As of December 31, 2007, our portfolio of mortgage loans serviced for others was $114.6 million.
We have originated multi-family and commercial real estate loans since November 1995. Loans are underwritten by designated lending staff or the respective loan committee depending on the size of the loan, and are serviced on an in-house real estate loan servicing system.
In addition we have five commercial real estate and multi-family participation loans secured by properties located in the Puget Sound region, which were originated and underwritten to our standards. As of December 31, 2007, the balance of the participation loans totaled $8.6 million. All of these loans were performing in accordance with their contractual terms and were current as of December 31, 2007.
We purchased 67 single-family loans to low income borrowers from Habitat for Humanity of Tacoma/Pierce County in early 2007. The loans were purchased for $2.1 million and are expected to generate an acceptable return to the Bank. The loans were purchased with recourse rights and will be serviced similar to other single-family loans.
One- to four-family residential construction loans are underwritten by designated lending staff or the respective loan committee, depending on the size of the loan and are serviced on our in-house loan servicing system. Loan documents are provided by a third-party specializing in commercial and construction lending documentation.
The following table shows total loans originated, purchased, sold and repaid during the periods indicated.