| RAINIER PACIFIC FINANCIAL GROUP INC Item 1A Risk Factors 47 Item 1A Risk Factors |
| Ownership of Rainier Pacific Financial Groupapstas common stock involves risk and investors should consider the following risk factors |
| In assessing these risks you should also refer to the other information set forth herein, including Rainier Pacific Financial Groupapstas financial statements and related notes |
| Our loan portfolio possesses increased risk due to the substantial growth in the outstanding balances of multi-family and commercial real estate loans, real estate construction loans, and a significant portfolio percentage of indirect auto and consumer loans |
| Our multi-family and commercial real estate loans, construction loans, commercial business loans, and consumer loans accounted for approximately 85dtta4prca of our total loan portfolio as of December 31, 2005 |
| We consider these types of loans to involve a higher degree of risk compared to first mortgage loans on one- to four-family, owner-occupied residential properties |
| We have traditionally focused on consumer lending, using a risk-based pricing model |
| As of December 31, 2005, consumer loans, including our home equity loans, totaled dlra101dtta8 million |
| These loans are more likely to become delinquent or default than real estate secured loans, and therefore may cause higher future loan losses |
| In addition, we have increased our emphasis on multi-family and commercial real estate lending and residential construction loans |
| Accordingly, as a result of the inherent risks associated with these types of loans, and the unseasoned nature of a portion these loans, it may become necessary for us to increase the level of our provision for loan losses |
| An increase in our provision for loan losses would reduce our profits |
| From December 31, 2003, through December 31, 2005, our total loans have grown by 30dtta2prca |
| In connection with this rapid expansion, a significant portion of the growth occurred in our multi-family, commercial real estate, and construction loan portfolio, which are relatively unseasoned |
| This means that these loans have not performed for a sufficient time to indicate the magnitude of potential losses |
| At December 31, 2005, dlra33dtta4 million, or 5dtta7prca, of our total loans were loans that we originated indirectly through a network of automobile dealers |
| Because these loans are originated through auto dealers and not directly by us and are secured by automobiles that depreciate rapidly in value, they present greater risks than other types of lending activities |
| For further information concerning the risks associated with multi-family, and commercial real estate loans, construction loans, and consumer loans, see "e Item 1 |
| We have increased our construction lending which presents greater risk than one to four family and consumer lending |
| Construction lending is generally considered to involve a higher level of risk as compared to single- family residential or consumer lending, as a result of the concentration of principal in a limited number of loans and borrowers, and the effects of general economic conditions on developers and builders |
| Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a propertyapstas value at completion of the project and the estimated cost (including interest) of the project |
| The nature of these loans is such that they are generally more difficult to evaluate and monitor |
| In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk to us than construction loans to individuals on their personal residences |
| Construction loans on land under development or held for future construction also poses additional risk because of the lack of income being produced by the property and the potential illiquid nature of the security |
| Our commercial business lending has increased since 2004 and we intend to continue to offer commercial business loans to small and medium sized businesses |
| Our ability to originate commercial business loans is determined by the demand for these loans and our ability to attract and retain qualified commercial lending 47 personnel |
| Because payments on commercial business loans generally depend on the successful operation of the business involved, repayment of commercial business loans may be subject to a greater extent to adverse conditions in the economy than other types of lending |
| Although commercial business loans often have equipment, inventory, accounts receivable or other business assets as collateral, the sale of the collateral in the event the borrower does not repay the loan is often not sufficient to repay the loan because the collateral may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things |
| Consequently, there can be no assurance that we will continue to be successful in these efforts |
| A significant decline or rise in interest rates may hurt our profits, net portfolio value and equity |
| If short-term interest rates were to rapidly rise, the Bank will not be able to increase the rates it earns on its loans and investments in the same proportion or as rapidly as the increase it would experience in its cost of deposits and other interest-bearing liabilities |
| The difference between the rates received on interest-earning assets and the rates paid on interest-bearing liabilities is referred to as our interest rate spread |
| When our interest rate spread decreases, so does our profitability |
| When interest rates rise, our net interest income and the value of our assets could be significantly reduced if interest paid on interest-bearing liabilities, such as deposits and borrowings, increases more quickly than interest received on interest-earning assets, such as loans, investment securities and mortgage-backed securities |
| For example, if we experienced an immediate 200 basis point increase in interest rates as of December 31, 2005, the market value of our portfolio equity could decrease by dlra14dtta8 million, or 18dtta7prca |
| In addition, rising interest rates may also reduce the demand for loans such as real estate loan refinancings and the resulting interest income |
| Management also expects reduced income from secondary marketing activities in a rising rate environment with corresponding reductions in the gains on the sale of loans and securities |
| The economy in our local market area may adversely affect our operations |
| Our financial results may be adversely affected by changes in prevailing economic conditions, including: decreases in real estate values, changes in interest rates, and adverse employment conditions; the monetary and fiscal policies of the federal government; and other significant external events |
| Because we hold a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral for these loans |
| Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings |
| If our allowance for loan losses is not sufficient to cover future loan losses, our earnings could decrease |
| We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans |
| In determining the amount of the allowance for loan losses, we review several factors including our loan loss and delinquency experience, underwriting practices, and economic conditions |
| If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover future losses in the loan portfolio, resulting in the need for greater additions to our allowance |
| Material additions to the allowance could materially decrease our net income |
| Our allowance for loan losses was 1dtta47prca of total loans and 7cmam541dtta23prca of non-performing loans at December 31, 2005 |
| In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs |
| Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations |
| 48 Strong competition within our market area may limit our growth and profitability |
| Competition in the banking and financial services industry is intense |
| In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual fund companies, insurance companies, and investment brokerage and financial planning firms operating locally and elsewhere |
| Many of these competitors have substantially greater resources and lending limits than we do and may offer certain services that we do not or cannot provide |
| Our profitability depends upon our continued ability to successfully compete in our market |
| Loss of key personnel may hurt our operations because it may be difficult to hire qualified replacements |
| The loss of the President and Chief Executive Officer or other executive officers could have a material adverse impact on our operations since they have been instrumental in managing the business affairs of the Company |
| If we were to lose these executive officers, the board of directors would most likely have to search outside of the Company for qualified, permanent replacements |
| This search may be prolonged and we cannot assure you that we will be able to locate and hire qualified replacements in a timely manner |
| For a discussion of Rainier Pacific Financial Groupapstas management, see "e Item 1 |
| Business - Personnel - Executive Officers of the Registrant "e |
| If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and as a result, investors and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock, and our ability to attract additional deposits |
| In connection with the enactment of the Sarbanes-Oxley Act of 2002 ( "e Act "e ) and the implementation of the rules and regulations promulgated by the SEC, we document and evaluate the Companyapstas internal control over financial reporting in order to satisfy the requirements of Section 404 of the Act |
| This requires us to prepare an annual management report on our internal control over financial reporting, including among other matters, managementapstas assessment of the effectiveness of internal control over financial reporting and an attestation report by the Companyapstas independent auditors addressing these assessments |
| If we fail to identify and correct any significant deficiencies in the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current and potential shareholders and depositors could lose confidence in our internal controls and financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock, and our ability to attract additional deposits |
| If external funds were not available, this could adversely impact our growth and future prospects |
| We rely on deposits, brokered deposits, advances from the FHLB-Seattle, and other borrowings to fund our operations |
| Although we have historically been able to replace maturing deposits if desired, no assurance can be given that we will be able to replace such funds in the future if our financial condition or market conditions were to change |
| Although we consider the sources of existing funds adequate for our current liquidity needs, we may seek additional brokered deposits or debt in the future to achieve our long-term business objectives |
| There can be no assurance additional funds, if sought, would be available to us or, if available, would be on favorable terms |
| If additional financing sources are unavailable or are not available on reasonable terms, our growth and future prospects could be adversely affected |
| We are subject to extensive government regulation and supervision |
| We are subject to extensive federal and state regulation and supervision primarily through the Bank |
| Banking regulations are primarily intended to protect depositors &apos funds, federal deposit insurance funds and the banking system as a whole, not shareholders |
| These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things |
| Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes |
| Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could 49 affect the Company in substantial and unpredictable ways |
| Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-bank enterprises to offer competing financial services and products, among other things |
| Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations |
| While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur |
| See Item 1, "e Business-Regulation "e |
| Our information systems may experience an interruption or breach in security |
| We rely heavily on communications and information systems to conduct our business |
| Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems |
| While we have policies and procedures designed to prevent or limit the effect of potential failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed |
| The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations |
| We rely on dividends from our subsidiary for most of our cash flow |
| Rainier Pacific Financial Group is a separate and distinct legal entity from its subsidiary, Rainier Pacific Bank |
| Rainier Pacific Financial Group receives substantially all of its cash flow from dividends from its subsidiary |
| These dividends are the principal source of funds to pay dividends on our common stock and our operating expenses |
| Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to us |
| Also, our right to participate in a distribution of assets upon our subsidiaryapstas liquidation or reorganization is subject to the prior claims of the subsidiaryapstas creditors |
| In the event the Bank is unable to pay dividends to us, we may not be able to pay our obligations or pay dividends on our common stock |
| The inability to receive dividends from the Bank could have a material adverse effect on our business, financial condition and results of operations |
| See Item 1, "e Business-Regulation "e |