| SECURITIES AND EXCHANGE COMMISSION | |||||
| Washington, D.C. 20549 | |||||
FORM 10-K/A | |||||
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| For the Fiscal Year Ended December 31, 2004 | OR | ||||
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File Number: 0-50362 | |||||
RAINIER PACIFIC FINANCIAL GROUP, INC. | |||||
| (Exact name of registrant as specified in its charter) | |||||
| Washington | |||||
| (State or other jurisdiction of incorporation | |||||
| or organization) | |||||
| 1498 Pacific Avenue, Tacoma, Washington | |||||
| (Address of principal executive offices) | |||||
| Registrant's telephone number, including area code: | |||||
| Securities registered pursuant to Section 12(b) of the Act: | |||||
| Securities registered pursuant to Section 12(g) of the Act: | |||||
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 an accelerated filer (as defined in Exchange Act Rule 12b-2):
YES X NO
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 on June 30, 2004 was $124,000,403 (7,588,764 shares at $16.34 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.
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EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A amends the Annual Report on Form 10-K for the year ended December 31, 2004 ("Original Report") of Rainier Pacific Financial Group, Inc. ("Company"), and is being filed to include Management's Annual Report on Internal Control Over Financial Reporting and the related attestation of Moss Adams, LLP included in its Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting. These reports were initially omitted from the Original Report as permitted by the Order Under Section 36 of the Securities Exchange Act of 1934 Granting an Exemption from Specified Provisions of Exchange Act Rules 13a-1 and 15d-1 issued by the Securities and Exchange Commission ("SEC") on November 30, 2004. Conforming changes have also been made to Item 9A and Exhibits 31.1 and 31.2 included in the Original Report. Exhibits 23 and 32 are being currently dated but are otherwise unchanged from those filed in the Orig inal Report. No other changes to the Original Report have been made.
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PART II
Item 8.Financial Statements and Supplementary Data
| Page | |
| Management's Annual Report on Internal Control Over Financial Reporting | 2 |
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | 3 |
| Report of Independent Registered Public Accounting Firm | 5 |
| Consolidated Statement of Financial Condition at December 31, 2004 and 2003 | 6 |
| Consolidated Statement of Income For the Years Ended December 31, 2004, 2003, and 2002 | 7 |
| Consolidated Statement of Shareholders' Equity For the Years Ended December 31, 2004, 2003 and 2002 | 8 |
| Consolidated Statement of Cash Flows For the Years Ended December 31, 2004, 2003 and 2002 | 9 |
| Notes to Consolidated Financial Statements | 10 |
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Management's Annual Report on Internal Control Over Financial Reporting
The management of Rainier Pacific Financial Group, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
This process includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, because of changes in conditions, the effectiveness of internal control may vary over time.
The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. Management's assessment was based on criteria described in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on that assessment, the Company's management concluded that the Company's internal control over financial reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by Moss Adams LLP, the Company's independent registered public accounting firm who audits the Company's consolidated financial statements. The attestation report of Moss Adams LLP expresses unqualified opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting as of December 31, 2004.
Respectfully submitted,
| /s/ John A. Hall | /s/ Joel G. Edwards | |
| John A. Hall President and Chief Executive Officer April 15, 2005 | Joel G. Edwards Vice President and Chief Financial Officer April 15, 2005 | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders of
Rainier Pacific Financial Group, Inc. and Subsidiary
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Rainier Pacific Financial Group, Inc. and Subsidiary (Rainier Pacific Financial Group, Inc. or the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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In our opinion, management's assessment that Rainier Pacific Financial Group, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Rainier Pacific Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of Rainier Pacific Financial Group, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004 and our report dated February 4, 2005, except for note 13 as to which the date is February 16, 2005, expressed an unqualified opinion thereon.
/s/ Moss Adams LLP
Everett, Washington
April 15, 2005
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Rainier Pacific Financial Group, Inc.
We have audited the accompanying consolidated statement of financial condition of Rainier Pacific Financial Group, Inc. and Subsidiary (the Company) at December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rainier Pacific Financial Group, Inc. and Subsidiary at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/Moss Adams LLP
Everett, Washington
February 4, 2005, except for note 13 as to which the date is February 16, 2005.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION(dollars in thousands)
ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes. 6
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME(dollars in thousands except per share data)
7 See accompanying notes.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY(dollars in thousands)
See accompanying notes. 8
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS(dollars in thousands)
9 See accompanying notes.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Operations and Summary of Significant Accounting Policies
Organization - Effective January 1, 2001, Rainier Pacific, a Community Credit Union (the "Credit Union") converted from a state chartered community credit union to a state chartered mutual savings bank and changed its name to Rainier Pacific Savings Bank (the "Bank") doing business as Rainier Pacific Bank. On October 20, 2003, the Bank converted from a mutual savings bank to a stock savings bank. In connection with the conversion, the bank holding company, Rainier Pacific Financial Group, Inc. (the "Company") was formed. The Company purchased 100% of the Bank's common stock simultaneous with the Bank's conversion to a stock form of organization and the Company's offering and sale of common stock to the public.
The Bank provides a full range of banking services to consumers and small to medium-sized businesses and professionals through 12 banking offices located in Pierce and South King Counties, Washington. Support Systems, Inc. ("SSI"), a wholly-owned subsidiary of the Bank, operates Rainier Pacific Insurance Agency and Rainier Pacific Financial Services.
Principles of consolidation and basis of presentation - The consolidated financial statements include the accounts of the Company, the Bank and SSI. All significant intercompany transactions and balances have been eliminated. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and predominant practices followed by the financial services industry.
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated statements of financial condition, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held-for-sale, management obtains independent appraisals for significant properties.
Cash and cash equivalents - Cash and cash equivalents consist of vault and automated teller machine cash and non-interest bearing deposits in depository institutions, including the Federal Reserve and the Federal Home Loan Bank. Cash and cash equivalents have a maturity of three months or less. Cash and cash equivalents also includes $1,057,000 and $149,000 of cash that is restricted due to a vendor contractual relationship as of December 31, 2004 and 2003, respectively.
Interest bearing deposits with banks - Interest bearing deposits with banks include interest bearing deposits at various financial institutions, including the Federal Home Loan Bank. At times throughout the year, the Bank has balances that exceed FDIC insured limits.
Securities available-for-sale- Securities available-for-sale represent securities that may be sold prior to maturity. These securities are stated at fair value, and any unrealized net gains or losses are reported as a separate component of equity until realized, net of any tax effect. Changes in the fair value of investments classified as available-for-sale are reflected as direct charges or credits to equity, net of any tax effect. Gains and losses on the sale of securities available-for-sale are determined using the specific identification method. Fair value is determined using published quotes as of the close of business. Premiums or discounts are recognized in interest income using the interest method.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Operations and Summary of Significant Accounting Policies
(continued)
Securities available-for-sale may be sold in response to changes in market interest rates, repayment rates, the need for liquidity, and changes in the availability and yield on alternative investments. Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends. If negative evidence outweighs positive evidence that the carrying amount is recoverable within a reasonable period of time, the impairment is deemed to be other-than-tempor ary and the security is written down in the period in which such determination is made.
Securities held-to-maturity - Securities for which the Bank has the positive intent and ability to hold until maturity are classified as securities held-to-maturity and are recorded at cost, adjusted for unamortized premiums or discounts. Premiums or discounts are recognized in interest income using the interest method. Impairment for securities held-to-maturity is determined using the same methodology as securities available-for-sale.
Permanent declines, if any, in the fair value of individual securities held-to-maturity that are below cost are included in earnings as realized losses.
Federal Home Loan Bank ("FHLB") stock - As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specified percentages of its outstanding FHLB advances (i.e. borrowed funds) and requirements of the FHLB's Mortgage Purchase Program. The Bank's investment in FHLB stock is carried at par value ($100 per share), which reasonably approximates its fair value. The Bank may request redemption at par value of any stock in excess of the amount the Bank is required to hold. Stock redemptions are at the discretion of the FHLB.
Loans held-for-sale - Mortgage loans originated and designated as held-for-sale are carried at the lower of cost or estimated fair value, as determined by quoted market prices, under the aggregate method. Net unrealized losses are recognized in a valuation allowance by charges to income. Gains or losses on the sale of such loans are based on the specific identification method. The Bank held no loans for sale at December 31, 2004 or 2003. In January 2005, the Bank identified and sold $5.3 million of first mortgage real estate loans.
Loans and allowance for loan losses - Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, are reported at their unpaid outstanding principal balance, are adjusted for unearned discounts, net of unamortized, non-refundable fees and related direct loan origination costs. Interest income is accrued as earned. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an adjustment to the yield of the related loan.
Interest on loans is recognized over the terms of the loans and is calculated using the simple-interest method on principal amounts outstanding. Accrual of interest is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due or when the loan becomes past due 90 days as to either principal or interest. When the interest accrual is discontinued, all accrued interest is reversed against current income. Interest income is recognized when the borrower makes subsequent payments. The accrual of interest is resumed when, in management's opinion, the collectibility of principal and interest is no longer in doubt.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Operations and Summary of Significant Accounting Policies
(continued)
The Bank maintains an allowance for loan losses to absorb credit losses inherent in the loan portfolio. The allowance is based on ongoing assessments of probable estimated credit losses. The allowance is increased by the provision for loan losses, which is charged against current operating results and decreased by the amount of charge-offs, net of recoveries.
The Bank's methodology for assessing the appropriateness of the allowance consists of three elements: the formula allowance, the specific allowance, and the general allowance. The formula allowance is calculated by applying a loss percentage to the various loan pool types based on historical information such as past due ratios and loss experience. These factors may be adjusted for events deemed significant by management as of the evaluation date. The specific allowance is determined based upon estimated probable losses on specific loans in the portfolio. The general allowance is established to ensure the adequacy of the allowance in situations where management believes that estimation risk exists or when there are other risk factors associated with the collectibility of the portfolio that may not be adequately addressed in the formula or specific portions of the allowance.
These evaluations are inherently subjective as they require estimates that are susceptible to significant revision as more information becomes available. Additionally, state and federal regulators, upon examination, may require the Bank to make additional provisions or adjustments to the allowance.
Premises and equipment - Land is stated at cost. Land improvements, buildings, leasehold improvements and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:
| Buildings and improvements | 5 - 40 years | |
| Furniture, fixtures and equipment | 3 - 12 years |
Leasehold improvements are amortized over the term of the lease or the estimated useful life of the improvement, whichever is less. Gains and losses on dispositions are reflected in current operations. Expenditures for major improvements are capitalized and ordinary maintenance and repairs are charged to operations, as incurred.
The Bank reviews premises and equipment for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of specific assets may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. In circumstances where impairment is determined to exist, the Bank will write down the assets to their fair value based on either the present value of estimated expected future cash flows or anticipated realizable market value. In circumstances where a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over its shortened useful life.
Collateral in liquidation and other real estate owned - Collateral in liquidation and other real estate owned (obtained through repossession or foreclosure) is recorded at the lower of its acquisition cost or its net realizable value. The Bank held $54,000 and $430,000 of such assets at December 31, 2004 and 2003, respectively, which are included in other assets.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Operations and Summary of Significant Accounting Policies
(continued)
Transfers of financial assets - Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Mortgage servicing rights - Servicing assets are recognized when rights are acquired through the sale of mortgage loans. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans sold. Servicing assets are evaluated for impairment based upon the fair value of the assets as compared to amortized cost.
Mortgage loans serviced for others include whole loans sold to Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home Loan Banks ("FHLB"), and Federal National Mortgage Association ("FNMA"). Loans being serviced for FHLMC, FHLB and FNMA totaled $99,416,000 and $76,904,000 at December 31, 2004 and 2003, respectively.
Income taxes - The Company, Bank and SSI file a consolidated tax return. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Other intangible assets - In December 2000, the Bank's wholly-owned subsidiary, SSI, acquired the rights to customers and policies of a local insurance agency for $350,000. The purchase amount was accounted for as an intangible asset and is included in other assets in the statement of financial condition. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,Goodwill and Other Intangible Assets, intangible assets are amortized and periodically tested for impairment. The balance of the intangible asset was $210,000 and $245,000 as of December 31, 2004 and 2003, respectively.
Marketing- The Bank expenses marketing costs as they are incurred. Marketing expense was $1,205,000, $1,143,000 and $999,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
Comprehensive income- Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes items previously recorded directly to equity, such as unrealized gains and losses on securities available-for-sale. Comprehensive income is presented in the Consolidated Statement of Shareholders' Equity.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Operations and Summary of Significant Accounting Policies
(continued)
Segment reporting - The Bank's operations are solely in the financial services industry and include providing to its customers traditional banking and other financial services. The Bank operates primarily in the Puget Sound geographical region of Washington State. Management makes operating decisions and assesses performance based on an ongoing review of the Bank's consolidated financial results. Therefore, the Bank has a single operating segment for financial reporting purposes.
Employee stock ownership plan - The Bank sponsors a leveraged Employee Stock Ownership Plan ("ESOP"). Under Statement of Position ("SOP") No. 93-6,Employers' Accounting for Employer Stock Ownership Plans, as shares are committed to be released from collateral, compensation expense is recorded equal to the market price of the shares, and the shares become outstanding for purposes of earnings per share calculations. Cash dividends on allocated shares (those credited to ESOP participants' accounts) are recorded as a reduction of retained earnings and paid directly to plan participants or distributed directly to participants' accounts. Cash dividends on unallocated shares (those held by the ESOP not yet credited to participants' accounts) are recorded as a reduction of debt and accrued interest. At December 31, 2004, there were 593,952 unallocated shares in the plan (Note 11). Shares released on December 31, 2004 totaled 67,896 and were credited to plan parti cipants' accounts in February 2005.
Stock Based Compensation -The Company measures its employee stock-based compensation arrangements using the provisions outlined in Accounting Principles Board ("APB") Opinion No. 25,Accounting for Stock Issued to Employees, which is an intrinsic value-based method of recognizing compensation costs. The Company has adopted the disclosure-only provisions of SFAS No. 123,Accounting for Stock - Based Compensation, as amended by SFAS No. 148,Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of SFAS No. 123.
If the Company had elected to recognize compensation cost based on the fair value at the grant dates for awards under its plan, consistent with the method described in SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below for the years ended December 31:
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Operations and Summary of Significant Accounting Policies
(continued)
The fair value of options granted were estimated on the date of grant using the binomial option-pricing model with the following assumptions for the years ended December 31:
Earnings per share ("EPS") data - The Company displays basic and diluted EPS in the consolidated statement of income. Basic EPS is computed by dividing net income or loss by the weighted average number of shares outstanding during the period. Diluted EPS is computed by dividing net income or loss by the diluted weighted average shares outstanding, which includes common stock equivalent shares outstanding using the treasury stock method, unless such shares are anti-dilutive. Common stock equivalents include the stock options and stock awards under the 2004 Stock Option Plan and 2004 Management Recognition Plan ("MRP") approved by the shareholders in April 2004. Unallocated shares relating to the employee stock ownership plan debt obligation are deducted in the calculation of weighted average shares outstanding.
Recent accounting pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123 (revised 2004),Share Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,Statement of Cash Flows. Generally, the approach in Statement 123 (R) is similar to the approach described in Statement No. 123. However, Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Statement 123 (R) must be adopted no later than July 1, 2005, and the Company expects to adopt the Statement on that date. The Company plans to adopt Statement 123 (R) using the "modified prospective" method in which compensation cost is recognized beginning with the effective date based on the requirements of Statement 123 (R) for all share-based payments granted after the effective date and based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123 (R) that remain unvested on the effective date.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Operations and Summary of Significant Accounting Policies
(continued)
As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method as detailed in APB Opinion No. 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123 (R)'s fair value method will have an impact on the Company's results of operations. The impact of adopting Statement 123 (R) cannot be predicted at this time due to all implementation issues not yet being resolved or clarified.
Significant Group Concentrations of Credit Risk -The Bank accepts deposits and grants credit primarily within its local service area - Pierce County and South King County, Washington. The Bank has a diversified loan portfolio and grants consumer, commercial, and construction real estate loans, and is not dependent on any industry or group of customers. Although the Bank has a diversified loan portfolio, a substantial portion of its loans are real-estate related.
Reclassifications - Certain amounts in the prior years have been reclassified to conform to the 2004 presentation.
Note 2 - Restricted Assets
Federal Reserve Board regulations require that the Bank maintain certain minimum reserve balances as either cash on hand, in the vault or on deposit with the Federal Reserve Bank. The minimum reserve balance as of December 31, 2004 and 2003 was approximately $1,144,000 and $1,950,000, respectively. In addition, cash and cash equivalents includes $1,057,000 and $149,000 of cash that is restricted due to a vendor contractual relationship as of December 31, 2004 and 2003, respectively.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Securities
The following summarizes the recorded value, gross unrealized gains and losses, and the estimated fair value of the Bank's investment securities at December 31 (dollars in thousands):
Certain investment securities shown above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific events. At December 31, 2004 there were 46 investment securities with unrealized losses. The Company anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment. Management periodically evaluates each available-for-sale or held-to-maturity
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Securities (continued)
investment security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due solely to interest rate changes and the Company has the ability to hold all investment securities with identified impairments resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security.
At December 31, 2004, the weighted average yield on corporate securities, U.S. Government agency securities, mortgage-backed securities, municipal obligations and trust preferred securities was 3.37%, 2.24%, 3.61%, 4.06% and 4.90%, respectively. At December 31, 2003, the weighted average yield on corporate securities, U.S. Government agency securities, mortgage-backed securities, municipal obligations and trust preferred securities was 4.24%, 3.40%, 4.31%, 4.09% and 4.94%, respectively.
The recorded value and the fair value of investment securities at December 31, 2004, by contractual maturity, are shown below (dollars in thousands).
Expected maturities may differ from contractual maturities, due to call provisions or the prepayment of principal.
Securities valued at $130,174,000 and $1,787,000 were pledged to the FHLB and the Public Deposits Protection Commission as of December 31, 2004, respectively. Securities valued at $135,641,000 and $2,503,000 were pledged to the FHLB and the Public Deposits Protection Commission as of December 31, 2003, respectively.
Proceeds from sales of available-for-sale investment securities were $42,090,000, $18,333,000 and $92,204,000 in 2004, 2003 and 2002, respectively.
Gross gains from the sales of available-for-sale investment securities were $389,000, $200,000 and $511,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The Bank incurred gross losses of $216,000, $70,000 and $41,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans Receivable
The major classifications of loans are summarized as follows at December 31 (dollars in thousands):
There were $303,000 and $475,000 of impaired loans at December 31, 2004 and 2003, respectively. The Bank discontinued accruing interest on loans totaling $303,000 and $475,000 at December 31, 2004 and 2003, respectively. There were no specific allowances for impaired loans at December 31, 2004 and 2003. The average balance in impaired loans was approximately $479,000, $632,000 and $667,000 during the years ended December 31, 2004, 2003, and 2002, respectively. If interest on these loans had been accrued, such interest income would have been approximately $12,000, $26,000 and $193,000 for the years ended December 31, 2004, 2003 and 2002, respectively. At December 31, 2004, there were no commitments to lend additional funds to borrowers whose loans were classified as impaired. The effects of troubled debt restructurings are not considered material to the Bank's financial position and results of operations.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans Receivable (continued)
The following table sets forth the contractual maturities of the Bank's loan portfolio at December 31, 2004 (dollars in thousands):
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans Receivable (continued)
A summary of the changes in the allowance for loan losses is summarized as follows at December 31 (dollars in thousands):
Note 5 - Premises and Equipment
Premises and equipment are summarized as follows at December 31 (dollars in thousands):
Depreciation expense on premises and equipment totaled $3,030,000, $1,534,000 and $1,336,000 during the years ended December 31, 2004, 2003 and 2002, respectively.
The Bank sold its administrative office building in the city of Fife in January 1999 by entering into a sale and leaseback transaction whereby the Bank was leasing back a portion of the building over a seven-year term with a five-year option to renew. This lease was treated as an operating lease. In addition, the Bank provided financing to the purchasers of the administrative office building in the original amount of $6,150,000, at 7% interest, payable in monthly installments of $40,916, including interest, maturing in February 2009. The Bank modified its financing arrangement with the purchasers as of December 1, 2003 by changing the interest rate to 6%, payment to $34,793 and the maturity date to December 1, 2013. The balance on the loan at December 31, 2004 was $5,732,000, as compared to $5,803,000 at December 31, 2003.
The gain created by the sale of the administrative office building amounted to $3,122,000, of which $1,118,000 was recognized upon sale in January 1999, and $2,004,000 was deferred and was amortized using the straight-line method over the term of the financing. Due to the financing modification in December 2003, the amortization period of the gain was extended to December 2013. During the year ended December 31, 2004 $146,000 of the deferred gain was amortized into income and the amount of
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Premises and Equipment (continued)
deferred gain amortized for the years ended December 31, 2003 and 2002 was $200,000 and was included in gain on sale of premises and equipment, net.
In December 2004, the Bank terminated its lease of its former administrative office building and moved to a new location in its recently completed corporate office building in downtown Tacoma. Upon termination of the lease, the remainder of the deferred gain balance of $873,000 was recognized into income and is included in gain on sale of premises and equipment, net. Additionally, a lease termination fee of $125,000 was incurred and included in occupancy, net.
The Bank purchased approximately 32,000 square feet of property in downtown Tacoma, Washington in two phases in 1999 and 2002 to construct a mixed-use office/retail building. The building construction was substantially completed in December 2004 and the Company and Bank relocated its corporate and administrative offices from the former Fife building to the new facility in downtown Tacoma effective December 6, 2004. Capitalized expenditures for the building, improvements, furniture, and equipment related to this project primarily account for the $15,383,000 increase in total premises and equipment.
Note 6 - Mortgage Servicing Rights
The balance of capitalized mortgage servicing rights included in other assets at December 31, 2004 and 2003 was $295,000 and $141,000, respectively. The following summarizes mortgage servicing rights activity for the years ending December 31 (dollars in thousands):
The Bank sells real estate loans to the FHLMC, FNMA and FHLB, while retaining the servicing rights to those loans. The fair value of mortgage servicing rights is determined by the use of a valuation model that evaluates the estimated discounted future cash flows of the servicing rights. Assumptions used in the valuation model include the cost of servicing the loan, discount rate and anticipated prepayment speeds. The Bank assesses the impairment of the mortgage servicing rights based on the recalculation of the current market price of mortgage servicing rights, discounted for changes in actual prepayment speeds of the loans. Impairment is assessed on a pool-by-pool basis with any impairment recognized through a valuation allowance for the combined pools. The pools are combined as they all have similar interest rates, terms and risk characteristics.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Deposits
Interest bearing deposits held by customers at December 31 are summarized as follows (dollars in thousands):
A summary of certificates of deposit, by year of maturity, at December 31, 2004 is as follows (dollars in thousands):
Interest expense on deposit accounts for the years ended December 31 is summarized as follows (dollars in thousands):
The aggregate amount of time deposits in denominations of $100,000 or more was $43,616,000 and $28,913,000 at December 31, 2004 and 2003, respectively.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Borrowed Funds
At December 31, 2004, the Bank had credit facilities available from the FHLB of $336,956,000. The Bank had borrowed funds from the FHLB at December 31, 2004 and 2003 of $295,722,000 and $237,105,000, respectively. The borrowings are subject to an existing Advances, Security and Deposit Agreement. Under the agreement, virtually all of the Bank's assets, not otherwise encumbered, are pledged as collateral.
The Bank's borrowings consisted of the following during the years ended December 31, (dollars in thousands):
The scheduled maturities of borrowed funds at December 31, 2004 are as follows (dollars in thousands):
Expected maturities may differ from contractual maturities due to put provisions on $74,194,000 of the amount outstanding. Interest expense of $211,000, $80,000 and $70,000 was capitalized and reduced interest expense on borrowings for the years ended December 31, 2004, 2003 and 2002, respectively.
Note 9 - Federal Income Tax
The components of the federal income tax expense (benefit) for the years ended December 31 are as follows (dollars in thousands):
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Federal Income Tax (continued)
A reconciliation of the tax expense (benefit) based on statutory corporate tax rates on pre-tax income and the provision for federal income tax expense (benefit) shown in the accompanying consolidated statement of income for the year ended December 31, are as follows (dollars in thousands):
The following tables show the nature and components of the Bank's net deferred tax assets established at an estimated tax rate of 34% at December 31 (dollars in thousands):
Prior to 2003, the Bank qualified under the provisions of the Internal Revenue Service Code to deduct from taxable income a reserve for bad debts based on the experience method. The experience method allowed the Bank to deduct (add to the reserve for losses on loans) more for bad debt expense from taxable income than the actual losses incurred. Starting in 2003, the Bank became classified as a large bank and is now required to use the direct charge-off method. The Bank must now recapture any excess reserves previously recorded that exceed actual losses for taxable income purposes over the four years beginning in 2003. The recapture of the pre-2003 bad debt reserves recorded under the experience method does not result in a charge to earnings as these amounts are included in the deferred tax asset.
Management has determined that it is more likely than not that it will realize the deferred tax assets based upon the nature and timing of the items listed. There can be no assurances, however, that there will be no significant differences in the future between taxable income and pretax book income if circumstances change. In order to fully realize the net deferred tax asset, the Bank will need to generate future taxable income. Management has projected that the Bank will generate sufficient taxable income to utilize the net deferred tax asset; however, there can be no assurance as to such levels of taxable income generated.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Commitments and Contingent Liabilities
Loan commitments - The Bank is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These commitments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated statements of financial condition.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or termination clauses and may require payment of a fee. Since many of the commitments are expected to expire or be renewed without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank reviews customers' creditworthiness on a case-by-case basis when renewing or increasing commitments. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's evaluation of the customer.
At December 31, the Bank had outstanding commitments for the origination of loans and for unused lines of credit that are not reflected in the consolidated financial statements as follows (dollars in thousands):
The Bank does not anticipate any material losses as a result of the commitments.
Loans sold to the FHLB - The Bank sells mortgage loans to the FHLB and retains the servicing of all loans sold. Loans sold to the FHLB require a loan reserve account of 40 to 50 basis points to be established to offset any future charge-offs if they occur. There is no additional recourse on loans sold to the FHLB other than the reserve account. As of December 31, 2004, the reserve account totaled $79,000 and no portion of the loan reserve account was used to offset loan losses or was repaid to the Bank based upon satisfactory loan repayment.
Lease commitments (as lessee) - Rent expense under operating leases for administrative office space and branch premises for the year ended December 31, 2004 totaled $709,000, including a $125,000 lease termination fee incurred upon vacating the former administration building in Fife in December 2004. Rent expense under operating leases for administrative office space and branch premises for the years ended December 31, 2003 and 2002 totaled $489,000 and $412,000, respectively.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Commitments and Contingent Liabilities (continued)
As of December 31, 2004, the future minimum rent payments under the terms of the leases are as follows for future years ending December 31 (dollars in thousands):
Lease commitments (as lessor) - During the year ended December 31, 2004, the Bank leased office and retail space to others under non-cancelable operating leases requiring fixed monthly rentals over various terms, some of which contained escalation clauses providing for increased rents and excess operating expense reimbursements. As of December 31, 2004, the future minimum contractual lease rental receipts are as follows for future years ending December 31 (dollars in thousands):
Land and building commitments - On August 10, 2004, the Bank entered into a real estate purchase and sale agreement with a developer to purchase property on which to build a branch. The purchase and sale agreement is for $1.2 million and is dependant on the developer proceeding with the development of a shopping center.
On October 17, 2003, the Bank entered into an agreement with a contractor to construct a mixed-use office/retail building in downtown Tacoma to be used as the Company's new administrative offices, excluding interior improvements for the Bank and tenants for $10,847,000. This agreement was substantially fulfilled as of December 31, 2004. However, commitments remain related to completing tenant improvements for lessees in the amount of $2,628,000. These commitments are expected to be substantially complete by the end of the second quarter of 2005.
Financial instruments with concentrations of credit risk - Most of the Bank's loans and commitments were granted to customers in the Bank's primary market area, which is Pierce County and South King County. Significant changes in economic conditions in this area could affect the Bank's ability to collect loans.
Restrictions on equity- The Company and the Bank are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. For example, at the time of the Bank's conversion from a state chartered mutual savings bank to a state chartered stock savings bank, the Bank established a liquidation account in an amount equal to its equity of $43,493,000 as of June 30, 2003, the date of the latest statement of financial condition used in the final conversion prospectus. The liquidation account is maintained for the benefit of eligible account holders who maintain their deposit accounts in the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Commitments and Contingent Liabilities (continued)
account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank (and only in such an event), eligible depositors who have continued to maintain accounts will be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to the Bank's common stock. The Bank may not declare or pay cash dividends if the effect thereof would reduce its regulatory capital below the amount required for the liquidation account. The balance of the liquidation account as of December 31, 2004 and 2003 was $12,484,000 and $16,842,000, respectively.
Note 11 - Retirement Plans
Effective January 1, 2004 the Bank amended and restated its Profit Sharing 401(k) Plan into a 401(k) Employee Stock Ownership Plan ("ESOP") in order to provide a 401(k) profit sharing plan with employee stock ownership features for employees of the Bank and related entities. The 401(k) ESOP covers substantially all employees that meet certain age and service requirements. Under the plan, annual retirement expense is generally defined as a percentage of employee compensation, net of forfeitures from employees who have terminated employment.
Net expense related to the Bank's retirement plans recognized for the years ended December 31, 2004, 2003, and 2002 was $1,007,000, $631,000 and $590,000, respectively. In addition, the employer also provides a match of employee salary deferrals into the plan. The matching expense for the 401(k) ESOP recognized for the years ended December 31, 2004, 2003, and 2002 was $194,000, $248,000 and $225,000, respectively.
In October 2003, the ESOP borrowed $6,754,000 from the Company to purchase common stock of the Company. The loan will be repaid principally from the Bank's contributions to the ESOP over a period of ten years. The interest rate on the loan is 4.0% per annum.
For the year ended December 31, 2004, the 401(k) ESOP is committed to release 67,896 shares of the Company's common stock to participants. At December 31, 2004, the 401(k) ESOP had 593,952 unallocated shares remaining to be released. The fair value of the 593,952 restricted shares held by the ESOP trust was $10,632,000 at December 31, 2004.
Note 12 - Stock Option and Award Plans
2004 Stock Option Plan ("SOP") - On June 7, 2004 the Company granted nonqualified stock options of 351,750 shares of common stock to certain employees and directors and granted incentive stock options of 328,250 shares of common stock to certain employees. The fair market value of the Company's common stock on the date of grant was $16.26. The Company implemented the SOP to promote the long-term interests of the Company and its shareholders by providing an incentive to those key employees who contribute to the operating success of the Company. The maximum number of options that may be issued under the SOP is 844,284. Options are granted at the then fair market value and vest over five years. Options expire 10 years from the date of grant and are subject to certain restrictions and limitations.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stock Option and Award Plans (continued)
The following represents the stock option activity and option price information for the year ended December 31, 2004:
2004 Management Recognition Plan ("MRP") -The purpose of the MRP is to promote the long-term interests of the Company and its shareholders by providing restricted stock as a means for attracting and retaining directors and certain employees. The Company granted restricted stock awards of 336,800 shares of its common stock to its directors and certain employees on June 24, 2004. The fair market value of the restricted stock awards was $16.20 per share on June 24, 2004 and totaled $5.5 million. These restricted stock awards vest over a five-year period, and therefore, the cost of such will be accrued ratably over a five-year period as compensation expense. Compensation expense related to the MRP awards was $561,000 for the year ended December 31, 2004. Cash dividends are paid on MRP shares and distributed to the recipient as additional compensation. A total of 3,500 MRP shares were cancelled during the year ended December 31, 2004. There were 33 3,300 restricted shares outstanding at year-end.
Note 13 - Stockholders' Equity
Stock Repurchase Program - In May 2004, the Company's Board of Directors authorized its initial stock repurchase plan for a repurchase of up to 4% (337,714 shares) of the Company's then outstanding common stock for the 2004 Management Recognition Plan approved by shareholders in April 2004. By June 30, 2004, the Company had completed its initial repurchase of 337,714 shares of common stock. On July 20, 2004, the Board approved the repurchase of 5% of its outstanding shares (390,701 shares). The Company completed its repurchase of the 390,701 shares authorized on October 15, 2004, at an average price of $17.04 per share. On October 19, 2004, the Board approved the purchase of an additional 5% of its outstanding shares (371,915 shares). The Company completed its repurchase of 371,915 shares on December 17, 2004 at an average price of $17.79 per share. On December 22, 2004 the Company announced an additional repurchase program had been approved by the Board, for anoth er 5% of its outstanding common stock (353,860). A total of 3,550 shares had been repurchased under this program as of December 31, 2004 at an average price of $17.92. The Company completed its repurchase of 353,860 shares on February 15, 2005 at an average price of $17.70.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Stockholders' Equity (continued)
The Company announced an additional repurchase program had been approved by the Board on February 16, 2005 for another 5% of its outstanding shares (336,400). This repurchase is expected to take place over a six month period.
The following table sets forth information about the Company's repurchases of its outstanding common stock during the years ended December 31, 2004 and 2003:
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | |
| 2003 | - | $ - | - | - |
| 2004 | 1,103,880 | $ 17.04 | 1,103,880 | 350,310 |
Earnings Per Common Share- The following table presents the computation of basic and diluted earnings per share for the years ended December 31:
Note 14 - Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial results.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Regulatory Capital Requirements (cont.)
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier I capital to risk-weighted assets, and to average assets for leverage capital purposes, and total risk-based capital to total risk-based assets (set forth in the following table). Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject as of December 31, 2004 and 2003.
As of December 31, 2004, the Company and Bank were categorized as "well capitalized" under the regulatory framework for prompt corrective action promulgated by the Federal Deposit Insurance Corporation ("FDIC"). To be categorized as "well capitalized," the Company and Bank must maintain minimum total Tier I leverage, Tier I risk-based, and total risk-based capital ratios as set forth in the table below. There are no subsequent conditions or events that management believes have changed the "well capitalized" categorizations.
The Company's and the Bank's actual capital amounts and ratios are presented in the following table (dollars in thousands):
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Regulatory Capital Requirements (continued)
The following table is a reconciliation of the Bank's capital, calculated according to generally accepted accounting principles, to total Tier I capital at December 31 (dollars in thousands):
At periodic intervals, the FDIC and the Washington State Department of Financial Institutions (DFI) routinely examine the Bank as part of their legally prescribed oversight of the banking industry. Based on these examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings. A future examination by the FDIC or the DFI could include a review of certain transactions or other amounts reported in the Bank's 2004 financial statements. In view of the regulatory environment in which the Bank operates, the extent, if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the accompanying financial statements cannot presently be determined.
Note 15 - Related Party Transactions
During the normal course of business, the Bank originates loans to directors, committee members and senior management. Such loans are granted with interest rates, terms and collateral requirements substantially the same as those for all other customers.
The Bank had approximately $1,697,000 and $1,550,000 in outstanding loans related to these parties at December 31, 2004 and 2003, respectively.
The Bank had approximately $1,177,000 and $1,235,000 included in deposits related to these parties at December 31, 2004 and 2003, respectively.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Fair Value of Financial Instruments
The recorded amounts and estimated fair values of financial instruments at December 31 are as follows (dollars in thousands):
Fair value of financial instruments - The Bank has adopted SFAS No. 107,Disclosure About Fair Value of Financial Instruments, which requires disclosure of estimated fair values for financial instruments. Such estimates are subjective in nature and significant judgment is required regarding the risk characteristics of various financial instruments at a distinct point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. Major assumptions, methods and fair value estimates for the Bank's significant financial instruments are set forth below.
Cash and cash equivalents, interest bearing deposit with banks, and corporate drafts payable - The recorded amount approximates fair value.
Securities and Federal Home Loan Bank stock- The fair value of securities is based on quoted market prices or dealer quotes. FHLB stock is valued based on the most recent redemption value.
Loans- Fair values for loans are estimated for portfolios of loans with similar financial characteristics. Fair value for fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. Prepayment estimates are based on the historic experience of the market. Fair values for adjustable rate loans are estimated at recorded values due to their adjustability.
Deposits - The fair value of deposits with no stated maturity date is included at the amount payable on demand. The fair value of fixed maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered by the Bank for deposits of similar remaining maturities.
Borrowed funds - The fair value of borrowed funds is estimated by discounting the future cash flows of the borrowings at a rate which approximates the current offering rate of borrowings with a comparable remaining life.
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Fair Value of Financial Instruments (continued)
Off-balance sheet financial instruments - Commitments to extend credit represent the principal categories of off-balance sheet financial instruments (see Note 10). The fair value of these commitments is not material since they are for a short period of time and subject to customary credit terms.
Note 17 - Parent Company Only Financial Statements
Summary of condensed parent company financial information for Rainier Pacific Financial Group, Inc. as of December 31 (dollars in thousands):
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Parent Company Only Financial Statements (continued)
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Selected Quarterly Financial Data (Unaudited)
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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Selected Quarterly Financial Data (Unaudited) (continued)
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Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and other members of the Company's management team as of the end of the period covered by this annual report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective, in all material respects, in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. However, the Company continues to implement additional controls and processes to strengthen the overall system of internal controls. See "Changes in Internal Controls" below.
(b) Changes in Internal Controls: In the year ended December 31, 2004, the Company made significant changes in, and has taken corrective action regarding, its internal controls or other factors that could significantly affect the Company's disclosure controls and procedures.
On December 1, 2003, the Company through its primary subsidiary, Rainier Pacific Savings Bank ("Bank"), completed the installation and implementation of a new technology infrastructure. This new infrastructure involved the replacement of a majority of the Bank's central processing hardware and the replacement or introduction of numerous software applications such as loan origination and collections, credit and debit card processing, internet banking, core bank processing, customer relationship management, enterprise data warehousing, digital records management, and general ledger systems. In connection with these technology changes, and subsequent alterations thereto, management modified many previously established internal controls and processes where applicable, and has implemented and continues to implement additional controls and processes to strengthen the overall system of internal control over financial reporting. During the fourth quarter of 2004, chang es in the internal controls relating to automated clearing house transactions, automated teller machines transactions, credit and debit card processing, check clearing, systems security and access privileges, account reconciliations, segregation of duties, and the related management oversight have been made. These additional controls affect the Company's internal control over financial reporting, and as such were designed and implemented to ensure that information, in all material respects, continues to be accumulated and communicated to the Company's management in a timely manner, and in all material respects, continues to be reported accurately and timely.
Management does not believe any of the changes currently underway in the Bank's systems of internal control, or in other factors that could significantly affect internal control over financial reporting, have resulted in any significant deficiencies or material weaknesses in the Company's internal control over financial reporting subsequent to the date of their most recent evaluation.
(c) Management's Annual Report on Internal Control Over Financial Reporting: The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Act). As required by Rule 13a-15(c) of the Act, management has evaluated the effectiveness of the Company's internal control over financial reporting. Management's Annual Report on Internal Control Over Financial Reporting appears on page 2 of this Amendment No. 1 on Form 10-K/A.
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SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RAINIER PACIFIC FINANCIAL GROUP, INC. | ||
| Date: April 19, 2005 | By: | /s/John A. Hall |
| John A. Hall | ||
| President and Chief Executive Officer | ||
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EXHIBIT INDEX
| Exhibit Number | Description |
| 23 | Consent of Independent Registered Public Accounting Firm |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act |
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Rainier Pacific Financial Group, Inc.
We consent to the incorporation by reference in Registration Statement No. 333-117568 on Form S-8 of Rainier Pacific Financial Group, Inc. and subsidiary (Rainier Pacific Financial Group, Inc.) of our report dated February 4, 2005, except for Note 13, which is dated February 16, 2005, with respect to the consolidated statement of financial position of Rainier Pacific Financial Group, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated April 15, 2005, with respect to Rainier Pacific Financial Group, Inc. management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which reports are included in this amended annual report on Form 10-K of Rainier Pacific Financial Group, Inc. for the year ended December 31, 2004.
/s/Moss Adams LLP
Everett Washington
April 15, 2005
<PAGE>
Exhibit 31.1
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, John A. Hall, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Rainier Pacific Financial Group, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| c) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |
| Date: April 19, 2005 | ||
/s/John A. Hall
John A. Hall
Chief Executive Officer
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Exhibit 31.2
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Joel G. Edwards, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Rainier Pacific Financial Group, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| c) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |
| Date: April 19, 2005 | ||
/s/Joel G. Edwards
Joel G. Edwards
Chief Financial Officer
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF RAINIER PACIFIC FINANCIAL GROUP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K, that:
| 1. | the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and | |
| 2. | the information contained in the report fairly presents, in all material respects, the Company's financial condition and results of operations. | |
/s/John A. Hall /s/Joel G. Edwards
John A. Hall Joel G. Edwards
Chief Executive Officer Chief Financial Officer
Dated: April 19, 2005
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