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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
Available
Information
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.
(ii)
PART
I
Item
1. Business
General
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.
1
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.
Market
Area
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.
Delivery
Methods
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
2
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.
Lending
Activities
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.
3
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.
4
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.
5
The following table shows the
composition of Rainier Pacific Bank's loan portfolio by fixed- and
adjustable-rate loans at the dates indicated.
6
7
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.
8
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.
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
9
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.
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.
10
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.
11
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
12
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 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.
13
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.
14
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.
15
The following table shows total loans
originated, purchased, sold and repaid during the periods
indicated.
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