UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 2006
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File Number: 000-52000
ROMA FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
United States 51-0533946
---------------------------- -----------------------------------
(State or other jurisdiction I.R.S. Employer Identification No.)
of incorporation or organization)
2300 Route 33, Robbinsville, New Jersey 08691
--------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 223-8300
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.10 par value The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO
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. [X] YES [ ] 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 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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] YES [X] NO
As of June 30, 2006, the last business day of the registrant's most
recently completed second fiscal quarter, the registrant had not completed its
initial public offering, thus the aggregate market value of voting stock held by
non-affiliates of the registrant at that date was $0. As of March 1, 2007, there
were 32,731,875 shares outstanding of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2007 Annual Meeting of Shareholders.
(Part III)
PART I
Forward-Looking Statements
Roma Financial Corporation (the "Company" or "Registrant") may from
time to time make written or oral "forward-looking statements," including
statements contained in the Company's filings with the Securities and Exchange
Commission (including this Annual Report on Form 10-K and the exhibits thereto),
in its reports to stockholders and in other communications by the Company, which
are made in good faith by the Company pursuant to the "safe harbor" provisions
of the private securities litigation reform act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: The strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Business
-----------------
General
Roma Financial Corporation is a federally-chartered corporation
organized in January 2005 for the purpose of acquiring all of the capital stock
that Roma Bank (the "Bank") issued in its mutual holding company reorganization.
Roma Financial Corporation's principal executive offices are located at 2300
Route 33, Robbinsville, New Jersey 08691 and its telephone number at that
address is (609) 223-8300.
Roma Financial Corporation, MHC is a federally-chartered mutual holding
company that was formed in January 2005 in connection with the mutual holding
company reorganization. Roma Financial Corporation, MHC has not engaged in any
significant business since its formation. So long as Roma Financial Corporation
MHC is in existence, it will at all times own a majority of the outstanding
stock of Roma Financial Corporation.
Roma Bank is a federally-chartered stock savings bank. It was
originally founded in 1920 and
2
received its federal charter in 1991. Roma Bank's deposits are federally insured
by the Deposit Insurance Fund as administered by the Federal Deposit Insurance
Corporation. Roma Bank is regulated by the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation. The Office of Thrift Supervision also
regulates Roma Financial Corporation, MHC and Roma Financial Corporation as
savings and loan holding companies.
Roma Bank offers traditional retail banking services, one-to
four-family residential mortgage loans, multi-family and commercial mortgage
loans, construction loans, commercial business loans and consumer loans,
including home equity loans and lines of credit. As of March 2007, Roma Bank
operated from its main office in Robbinsville, New Jersey, and eight branch
offices located in Mercer, Burlington and Ocean Counties, New Jersey. As of
December 31, 2006, the Bank had 140 full-time employees and 33 part-time
employees. Roma Bank maintains a website at www.romabank.com.
Roma Financial Corporation conducted a minority stock offering during
2006 in which 30% of its outstanding stock was sold to the public in a
subscription offering. The offering closed July 11, 2006 and the net proceeds
from the offering were approximately $96.1 million (gross proceeds of $98.2
million for the issuance of 9,819,562 shares, less offering costs of
approximately $2.1 million). The Company also issued 22,584,995 shares to Roma
Financial Corporation, MHC and 327,318 shares to the Roma Bank Community
Foundation, Inc., resulting in a total of 32,731,875 shares issued and
outstanding after the completion of the offering. A portion of the proceeds were
loaned to the Roma Bank Employee Stock Ownership Plan (ESOP) to purchase 811,750
shares of the Company's stock at a cost of $8.1 million.
Throughout this document, references to "we," "us," or "our" refer to
the Bank or Company, or both, as the context indicates.
Competition
We operate in a market area with a high concentration of banking and
financial institutions, and we face substantial competition in attracting
deposits and in originating loans. A number of our competitors are significantly
larger institutions with greater financial and managerial resources and lending
limits. Our ability to compete successfully is a significant factor affecting
our growth potential and profitability.
Our competition for deposits and loans historically has come from other
insured financial institutions such as local and regional commercial banks,
savings institutions, and credit unions located in our primary market area. We
also compete with mortgage banking and finance companies for real estate loans
and with commercial banks and savings institutions for consumer loans, and we
face competition for funds from investment products such as mutual funds,
short-term money funds and corporate and government securities. There are large
competitors operating throughout our total market area, and we also face strong
competition from other community-based financial institutions. Approximately
thirty other institutions operate in the Bank's market area, with asset sizes
ranging from $150 million to $50+ billion.
3
Lending Activities
Analysis of Loan Portfolio
We have traditionally focused on the origination of one- to four-family
loans, which comprise a significant majority of the total loan portfolio. We
also provide financing for commercial real estate, including multi-family
dwellings/apartment buildings, service/retail and mixed-use properties, churches
and non-profit properties, medical and dental facilities and other commercial
real estate. After real estate mortgage lending, consumer lending is our next
largest category of lending and is primarily composed of home equity loans and
lines of credit. We also originate construction loans for individual
single-family residences and commercial loans to businesses and non-profit
organizations, generally secured by real estate.
4
Loan Portfolio Composition. The following table analyzes the
composition of our loan portfolio by loan category at the dates indicated.
At December 31,
----------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------ ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loans:
Real estate mortgage -
one-to-four family......... $207,755 48.31% $191,634 49.45% $201,385 58.95% $201,044 65.67% $174,764 67.16%
Real estate mortgage -
multi-family and
commercial.................. 65,848 15.31 53,614 13.84 42,435 12.42 26,563 8.68 11,827 4.55
Commercial business........... 3,724 .87 2,351 0.61 1,635 0.48 1,187 0.39 336 0.13
Consumer:
Home equity and
second mortgage.......... 127,450 29.63 118,318 30.53 86,772 25.40 73,037 23.86 71,606 27.52
Passbook or certificate.... 1,314 .30 1,071 0.28 1,410 0.41 1,151 0.37 1,129 0.43
Auto....................... 33 0.01 41 0.01 49 0.02 55 0.02 - 0.00
Other...................... - - 465 0.12 503 0.15 527 0.17 542 0.21
-------- ------- -------- -------- --------
Total consumer loans..... 128,797 29.95 119,895 30.94 88,734 25.98 74,770 24.42 73,277 23.16
-------- -------- -------- -------- --------
Construction.................. 23,956 5.57 20,020 5.16 7,423 2.17 2,589 0.84 - 0.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans.............. 430,080 100.00% 387,514 100.00% 341,612 100.00% 306,153 100.00% 260,204 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Construction loans
in process............. 8,353 7,659 5,151 1,065 -
Allowance for loan
losses.................. 1,169 878 750 702 637
Deferred loan (costs)
and fees, net........... 176 269 461 553 922
-------- -------- -------- -------- --------
9,698 8,806 6,362 2,320 1,559
-------- -------- -------- -------- --------
Loans receivable, net.... $420,382 $378,708 $335,250 $303,833 $258,645
======== ======== ======== ======== ========
5
Loan Maturity Schedule. The following tables set forth the maturity of
our loan portfolio at December 31, 2006. Demand loans, loans having no stated
maturity, and overdrafts are shown as due in one year or less. Loans are stated
in the following tables at contractual maturity and actual maturities could
differ due to prepayments.
At December 31, 2006
-------------------------------------------------------------------------------------------------------------
Real estate Real estate
mortgage - Mortgage - Home equity
one-to-four Multi-family Commercial and second Passbook or
family and commercial business mortgage loans certificate Auto Other Construction Total
------------- -------------- -------- -------------- ----------- ---- ----- ------------ -----
(In thousands)
Amounts Due:
Within 1 Year........ $ 209 $ 19,975 $ 837 $ 1,051 $ 1,314 $ - $ - $23,956 $ 47,342
---------- --------- ------- --------- ------- ----- ----- ------- ---------
After 1 year:
1 to 3 years....... 1,253 1,703 28 4,210 - - - - 7,194
3 to 5 years....... 630 1,322 1,182 9,036 - 33 - - 12,203
5 to 10 years...... 12,966 3,162 1,241 30,505 - - - - 47,874
10 to 15 years..... 53,691 10,462 94 39,073 - - - - 103,320
Over 15 years...... 139,006 29,224 342 43,575 - - - - 212,147
---------- --------- ------- --------- ------- ----- ----- ------- ---------
Total due
after one year..... 207,546 45,873 2,887 126,399 - 33 - - 382,738
---------- --------- ------- -------- ------- ----- ----- ------- ---------
Total amount due..... $ 207,755 $ 65,848 $ 3,724 $ 127,450 $ 1,314 $ 33 $ - $23,956 $ 430,080
========== ========= ======= ========= ======= ===== ===== ======= =========
6
The following table sets forth the dollar amount of all loans at
December 31, 2006 that are due after December 31, 2007.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Real estate mortgage -
one-to-four family...................... $ 185,909 $ 21,637 $ 207,546
Real estate mortgage -
multi-family and commercial.............. 27,767 18,106 45,873
Commercial business........................ 2,322 565 2,887
Consumer:
Home equity and second mortgage loans... 108,650 17,749 126,399
Auto.................................... 33 - 33
---------- ---------- ----------
Total............................... $ 324,681 $ 58,057 $ 382,738
========== ========== ==========
Residential Mortgage Lending. Our primary lending activity consists of
the origination of one- to four-family first mortgage loans. Fixed rate,
conventional mortgage loans are offered by the Bank with repayments terms
ranging from 10 years up to 40 years. One, three, five, seven and ten year
adjustable rate mortgages, or ARM's, are offered with up to 30 year terms at
rates based upon the one year U.S. Treasury Bill rate plus a margin. After the
initial one, three, five, seven or ten year term, the Bank's ARM's reset on an
annual basis and, with the exception of the seven year ARM, have two percent
annual increase caps and a six percent lifetime adjustment cap. The seven year
product has an initial first adjustment cap of five percent (two percent
thereafter) and a lifetime adjustment cap of six percent. There are no floors on
the rate adjustments.
The Bank offers applicants the opportunity to "buy-down" their mortgage
loan interest rates by remitting one to three discount points for conventional
loans and one point for ARMs. Borrowers may also accelerate the repayment of
their loan by taking advantage of a bi-weekly payment program.
Substantially all residential mortgages include "due on sale" clauses,
which are provisions giving the Bank the right to declare a loan immediately
payable if the borrower sells or otherwise transfers an interest in the property
to a third party. Property appraisals on real estate securing one- to
four-family residential loans are made by state certified or licensed
independent appraisers and are performed in accordance with applicable
regulations and policies. The Bank requires title insurance policies on all
first mortgage real estate loans originated. Homeowners, liability, fire and, if
applicable, flood insurance policies are also required.
One- to four-family first mortgage loans in excess of 80% loan-to-value
for single family or detached residences and 75% on condominium units require
private mortgage insurance. The Bank will originate residential mortgage loans
up to a maximum of 95% loan-to-value.
All of the Bank's residential mortgage loan products are available to
finance any owner occupied, primary or secondary (e.g., vacation homes), one- to
four-family residential dwelling. Loans for non-owner occupied one- to
four-family residences are originated in accordance with the Bank's commercial
real estate lending policies as investment properties and are included under the
commercial real estate category in the loan tables set forth herein.
7
We do not offer interest-only loan products because of our concerns
about the credit risks associated with these products. We are currently
exploring other mortgage products, including reverse mortgages as either a "for
fee" originator or as a portfolio lender. We may also seek to develop new
delivery channels such as maintaining a presence in the sales office of local
residential builders/developers.
Consumer Lending. The Bank offers fixed rate home equity loans and a
variable rate, revolving home equity line of credit product, each with a $10
thousand minimum and a $250 thousand maximum loan amount. Loan requests in
excess of $250 thousand are considered on a case-by-case basis. There are no
fees, points or closing costs associated with the application or closing of an
equity loan or line of credit. All equity financing is secured by owner
occupied, primary or secondary, one- to four-family residential property.
Underwriting standards establish a maximum loan-to-value ratio of 80% for single
family or detached residences and 75% for condominium units. Home equity loan
appraisals may be done by automated appraisal valuation models for loans with a
60% or less loan-to-value ratio.
Fixed rate home equity loans. Fixed rate home equity loans are offered
with repayment terms up to twenty years and are incrementally priced at
thresholds up to 60, 120, 180 and 240 months. Loan rates are reviewed weekly to
ensure competitive market pricing. Underwriting guidelines prescribe a maximum
debt-to-income ratio of forty percent; however the Bank will approve loans with
higher debt ratios with the requirement for a risk premium of twenty-five to
fifty basis points above the prevailing rate.
Variable rate, revolving home equity lines of credit. The Bank's home
equity line of credit is generally among the most competitive in its market
area. Lines of credit are priced at the highest published Wall Street Journal
Prime Interest Rate minus one-half of one percent, adjusted monthly with a rate
ceiling of eighteen percent. Repayment terms are based upon a twenty year
amortization, requiring monthly payments equivalent to 1/240th of the
outstanding principal balance (or $100, whichever is greater) plus accrued
interest on the unpaid balance for the billing cycle.
If the account is paid-off and closed via cancellation of the mortgage
lien then an early termination fee of $300 is charged if closed during the first
twelve billing cycles, or $200 if closed during the first twenty-four billing
cycles. There is no termination fee after twenty-four billing cycles.
Account loans. The Bank grants loans to bank customers collateralized
by deposits in specific types of savings/time deposit accounts. Money market
deposit passbook accounts are not eligible for account loans. A ninety percent
advance rate is provided at pricing three percent above the interest rate paid
on the collateral account.
Consumer lending is generally considered to involve a higher degree of
credit risk than residential mortgage lending. All consumer loans are secured
with either a first or second lien position on owner occupied real estate.
Account loans are fully secured. Consumer loan repayment is dependent on the
borrower's continuing financial stability and can be adversely affected by job
loss, divorce, illness or personal bankruptcy. The application of various
federal laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on consumer loans in the event of a
default.
Commercial Lending. Though the Bank has historically made loans to
businesses and not-for-profit organizations, it formalized its commercial
lending activities in 2003 with the establishment of a Commercial Loan
Department.
8
The majority of commercial loans approved and funded are commercial
real estate loans for acquisition or refinancing of commercial properties; The
Bank also offers a full menu of non-mortgage commercial loan products, tailored
to serve customer needs, as follows:
o lines of credit to finance short term working capital needs;
o small business revolving lines of credit;
o equipment acquisition lines of credit convertible to term
financing;
o short term time notes;
o term financing to finance capital acquisitions; and
o business vehicle financing.
We require personal guarantees on all commercial loans. Values are
established by conforming real estate appraisals. The Bank's guidelines for
commercial real estate collateral are as follows:
Collateral Maximum Loan-to-Value Maximum Amortization
---------- --------------------- --------------------
1-4 family residential (investment) 80% 20 years
Multi-family (5+ units) 75% 20 years
Commercial real estate (owner 80% 20 years
occupied)
Commercial real estate (non-owner 70% 20 years
occupied)
Advance rates for other forms of collateral include the following:
Collateral Maximum Loan-to-Value
---------- ---------------------
Commercial equipment 80% of invoice
Owned equipment 50% depreciated book value
Accounts receivable 70% of eligible receivables
Inventory (including work-in-process) 50% of cost
Liquid collateral publicly traded marketable securities, 70%
U.S. Government securities, 90%
The pricing for fixed rate commercial real estate mortgage loans
provides for rate adjustments after an initial term (primarily five years), and
at each anniversary thereafter, based on a margin plus the Bank's base rate
(Wall Street Journal Prime).
The variable rate loans are indexed to the Bank's base rate (Wall
Street Journal Prime) and are subject to change as the Bank's base rate changes.
9
Unlike single-family residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment from his or her
employment and other income, and which are secured by real property whose value
tends to be more easily ascertainable, commercial loans typically are made on
the basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial loans may be substantially dependent on the success of the business
itself and the general economic environment. Commercial loans, therefore, have
greater credit risk than residential mortgage or consumer loans. In addition,
commercial loans generally result in larger balances to single borrowers, or
related groups of borrowers, than one- to four-family loans. Commercial lending
also generally requires substantially greater evaluation and oversight efforts.
Construction Lending. We originate construction loans for residential
and commercial land acquisition and development, including loans to builders and
developers to construct one- to four-family residences on undeveloped real
estate, apartment buildings, and retail, office, warehouse and industrial or
other commercial space. Disbursements are made in accordance with an inspection
report by an architect, or, in the case of construction loans up to $500
thousand an inspection report by an approved appraiser or Bank personnel. Our
construction lending includes loans for construction or major renovations or
improvements of borrower-occupied residences, however, the majority of this
portfolio is commercial in nature.
The Bank's guidelines for construction lending are as follows:
Collateral Maximum Loan-to-Value Maximum Amortization
---------- --------------------- --------------------
Land 60% - unimproved 1 year
70% - with all municipal 1 year
approvals 1 year
70% - improved
Residential & commercial 75% (or 85% of cost) 1 year, with two 6-month
construction extensions
Construction lending is generally considered to involve a higher degree
of credit risk than residential mortgage lending. If the estimate of
construction cost proves to be inaccurate, we may be compelled to advance
additional funds to complete the construction with repayment dependent, in part,
on the success of the ultimate project rather than the ability of a borrower or
guarantor to repay the loan. If we are forced to foreclose on a project prior to
completion, there is no assurance that we will be able to recover all of the
unpaid portion of the loan. In addition, we may be required to fund additional
amounts to complete a project and may have to hold the property for an
indeterminate period of time.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500 thousand or 15% of the institution's unimpaired capital
and surplus. Accordingly, as of December 31, 2006, our loans to one borrower
legal limit was $20.4 million. However, the Bank has set an internal limit of
$5.0 million for the origination of loans to one borrower with authority to
exceed this internal limit vested in the Board of Directors.
Loans that exceed or approach the internal loans to one borrower limit
are fully reviewed by the Board of Directors before being approved. For
commercial loans, the Bank's Commercial Loan Policy requires Board approval for
loans in excess of $2.0 million. Prior to presentation to the Board, the loan
request is underwritten in accordance with policy and presented to the Officers
Commercial Loan Committee
10
for its consideration and recommendation to the Board for approval. The Board's
determination to grant a credit in excess of the $3.5 million internal limit is
based upon thorough underwriting that clearly demonstrates repayment ability and
collateral adequacy and these loans are approved only if the loan can be
originated on terms which suit the needs of the borrower without exposing the
Bank to unacceptable credit risk and interest rate risk.
At December 31, 2006, our largest single borrower had an aggregate loan
balance of approximately $6.2 million, secured by commercial real estate. Our
second largest single borrower had an aggregate loan balance of approximately
$4.0 million, secured by commercial real estate. Our third largest borrower had
a $3.6 million commercial real estate construction loan. At December 31, 2006,
the loans of these three borrowers were current and performing in accordance
with the terms of their loan agreements.
Loan Originations, Purchases, Sales, Solicitation and Processing. The
following table shows total loans originated, purchased, sold and repaid during
the periods indicated.
For the Year Ended December 31,
-------------------------------------------
2006 2005 2004
---- ---- ----
(In thousands)
Loan originations:
Real estate mortgage - one-to-four family............. $ 37,882 $ 19,139 $ 33,284
Real estate mortgage - multi-family and commercial.... 17,991 28,301 21,969
Commercial business................................... 1,340 1,087 2,338
Construction.......................................... 12,997 11,326 2,697
Consumer:
Home equity loans and second mortgage................. 41,389 42,347 24,172
Passbook or certificate............................... 2,050 502 947
Other................................................. 900 14,479 19,066
---------- ---------- ---------
Total loan originations................................. 114,549 117,181 104,473
---------- ---------- ---------
Loan purchases.......................................... - - -
---------- ---------- ---------
Loans sold (mortgage loans)............................. 732 2,734 4,245
Loan principal repayments............................... 71,945 71,053 68,855
---------- ---------- ---------
Total loans sold and principal repayments............... 72,677 73,787 73,100
---------- ---------- ---------
Increase (decrease) due to other items.................... - - -
---------- ---------- ---------
Net increase in loan portfolio............................ $ 41,872 $ 43,394 $ 31,373
========== ========== =========
Our customary sources of loan applications include repeat customers,
referrals from realtors and other professionals and "walk-in" customers. Our
residential loan originations are largely reputational and advertising driven.
It is the policy of the Bank to adhere to the residential mortgage
underwriting standards of the Mortgage Partnership Finance Program of the
Federal Home Loan Bank, as well the standards of Fannie Mae and Freddie Mac. The
Bank generally sells thirty year fixed rate mortgages that qualify for sale to
the secondary mortgage market in order to lessen its interest rate risk.
In November 2003, the Bank entered into an Agreement with the Federal
Home Loan Bank of New York to sell residential mortgages as a participating
institution in its Mortgage Partnership Finance Program. The Bank agreed to
deliver loans under a $5.0 million Master Commitment which was subsequently
increased in 2006 to $10.0 million. Sales commenced in 2004 and, through
December 31, 2006, $8.0 million had been delivered to the MPF program. In
addition to an origination premium, the Bank also realizes income from these
sales through the payment of credit enhancement fees and loan servicing income.
11
Aside from participations, the Bank did not purchase loans from any
third parties in the three years ended December 31, 2006. At December 31, 2006,
the total outstanding balance of loan participations purchased was $2.4 million,
representing a participation in a commercial construction loan with an area
thrift.
Loan Approval Procedures and Authority. Lending policies and loan
approval limits are approved and adopted by the Board of Directors. Loan
committees have been established to administer lending activities as provided by
lending policies. Two committee members may together approve non-commercial
loans up to $450 thousand. A majority of members is required to approve
non-commercial loans that contain credit policy exceptions, with the condition
that either the president or executive vice president be one of the approving
members. Non-commercial loans over $450 thousand require the approval of the
Board of Directors.
Commercial lending approval authority is as follows: up to $500
thousand, any two of the following: a commercial loan officer and either the
first vice president of lending, or the president or the executive vice
president; over $500 thousand and up to $1.0 million, any two of the following:
a commercial loan officer or the first vice president of lending and the
president or the executive vice president; over $1.0 million and up to $3.0
million, the loan committee; and over $3.0 million and up to 10% of the total
assets of the Bank, the Board of Directors.
Asset Quality
Loan Delinquencies and Collection Procedures. The borrower is notified
by both mail and telephone when a loan is thirty days past due. If the
delinquency continues, subsequent efforts are made to contact the delinquent
borrower and additional collection notices and letters are sent. When a loan is
ninety days delinquent, it is our general practice to refer it to an attorney
for repossession or foreclosure. All reasonable attempts are made to collect
from borrowers prior to referral to an attorney for collection. In certain
instances, we may modify the loan or grant a limited moratorium on loan payments
to enable the borrower to reorganize his or her financial affairs, and we
attempt to work with the borrower to establish a repayment schedule to cure the
delinquency.
As to mortgage loans, if a foreclosure action is taken and the loan is
not reinstated, paid in full or refinanced, the property is sold at judicial
sale at which we may be the buyer if there are no adequate offers to satisfy the
debt. Any property acquired as the result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until it is sold or otherwise
disposed of. When real estate owned is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value less
estimated selling costs. The initial writedown of the property is charged to the
allowance for loan losses. Adjustments to the carrying value of the property
that result from subsequent declines in value are charged to operations in the
period in which the declines occur. At December 31, 2006, we held no real estate
owned.
Loans are reviewed on a regular basis and are placed on non-accrual
status when they are more than ninety days delinquent, with the exception of a
passbook loan, the outstanding balance of which is collected from the related
passbook account along with accrued interest and a penalty when the loan is 120
days delinquent. Loans may be placed on a non-accrual status at any time if, in
the opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding
12
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan. At December 31, 2006, we had
approximately $363 thousand of loans that were held on a non-accrual basis.
Non-Performing Assets. The following table provides information
regarding our non-performing loans. As of each of the dates indicated, we did
not have any troubled debt restructurings or accruing loans which are
contractually past due 90 days or more. As of each of the dates indicated, we
did not have any non-performing assets other than the loans included in the
table below. At December 31, 2006, the allowance for loan losses totaled $1.2
million, non-performing loans totaled $363 thousand, and the ratio of allowance
for loan losses to non-performing loans was 322.04%.
At December 31,
------------------------------------------------------------
2006 2005 2004 2003 2002
--------- -------- -------- --------- ---------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate mortgage - one-to-four family... $ 362 $ 563 $ 650 $ 708 $ 1,030
Home equity and second mortgage loans....... 1 91 137 200 73
------ ------ ------ ------- --------
Total................................... 363 654 787 908 1,103
------ ------ ------ ------- --------
Total non-performing loans.................... 363 654 787 908 1,103
------ ------ ------ ------- --------
Real estate owned............................. - - - - 138
------ ------ ------ ------- --------
Total non-performing assets................... $ 363 $ 654 $ 787 $ 908 $ 1,241
====== ====== ====== ======= ========
Total non-performing loans to total loans..... 0.08% 0.17% 0.23% 0.30% 0.42%
======= ======= ======= ======== =========
Total non-performing loans to total assets.... 0.04% 0.08% 0.11% 0.14% 0.18%
======= ======= ======= ======== =========
Total non-performing assets to total assets... 0.04% 0.08% 0.11% 0.14% 0.20%
======= ======= ======= ======== =========
During the year ended December 31, 2006, gross interest income of $22
thousand would have been recorded on loans accounted for on a non-accrual basis
if those loans had been current, and no interest on such loans was included in
income for the year ended December 31, 2006.
Classified Assets. Management, in compliance with Office of Thrift
Supervision guidelines, has instituted an internal loan review program, whereby
non-performing loans are classified as substandard, doubtful or loss. It is our
policy to review the loan portfolio, in accordance with regulatory
classification procedures, on at least a quarterly basis. When a loan is
classified as substandard or doubtful, management is required to evaluate the
loan for impairment. When management classifies a portion of a loan as loss, a
reserve equal to 100% of the loss amount is required to be established or the
loan is to be charged-off.
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the Bank will sustain some loss if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets, or portions thereof,
13
classified as "loss" are considered uncollectible and of so little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the Bank to a sufficient
degree of risk to warrant classification in one of the aforementioned categories
but which have credit deficiencies or potential weaknesses are required to be
designated "special mention" by management.
Management's classification of assets is reviewed by the Board on a
regular basis and by the regulatory agencies as part of their examination
process. An independent loan review firm performs periodic reviews of our
commercial loan portfolios, including the verification of commercial loan risk
ratings. Any disagreements in risk rating assessments require mutual consent as
to the final risk rating.
The following table discloses the classification of assets and
designation of certain loans as special mention as of December 31, 2006. At
December 31, 2006, all of the classified assets and special mention designated
assets were loans.
At December 31,
----------------------------------------------
2006 2005 2004
---- ---- ----
(In thousands)
Special Mention.......... $ 1,717 $ 587 $ 218
Substandard.............. 49 133 342
Doubtful................. - - -
Loss..................... - - -
------- ------- ------
Total.................. $ 1,766 $ 720 $ 560
======= ======= ======
At December 31, 2006, none of the loans classified as "special mention"
and $19 thousand of the loans classified as "substandard" are included under
non-performing assets, as shown in the table above as they were paying as
agreed.
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses in our loan portfolio to the
extent they are both probable and reasonable to estimate. The allowance is
established through provisions for loan losses that are charged to income in the
period they are established. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely.
Recoveries on loans previously charged-off are added back to the allowance.
Management, in determining the allowance for loan losses, considers the
losses inherent in the loan portfolio and changes in the nature and volume of
our loan activities, along with general economic and real estate market
conditions. We utilize a segmented approach which identifies: (1) impaired loans
for which specific reserves are established; (2) classified loans for which a
higher allowance is established; and (3) performing loans for which a general
valuation allowance is established.
A loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement. All
loans identified as impaired are evaluated independently. We do not aggregate
such loans for evaluation purposes. Payments received on impaired loans are
applied first to unpaid interest and then to principal.
We maintain a loan review system which provides for a systematic review
of the loan portfolios and the early identification of potential impaired loans.
The review of residential real estate and home equity
14
consumer loans, as well as other more complex loans, is triggered by identified
evaluation factors, including delinquency status, size of loan, type of
collateral and the financial condition of the borrower. All commercial loans are
evaluated individually for impairment.
Specific loan loss allowances are established for identified loans
based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of the
loan portfolio, current economic conditions and management's judgment. In recent
years, our charge-offs have been low, with $20 thousand charged-off in 2003 and
none charged-off in 2004, 2005 or 2006. Therefore, our provisions for loan
losses have been reflective of other factors, including economic conditions,
annual growth of the total loan portfolio of 12%, 13% and 11% in 2004, 2005 and
2006, respectively, as well as the increasing percentage of multi-family,
commercial real estate and commercial loans relative to total loans, which rose
from 12.9% at December 31, 2004, 14.45% at December 31, 2005 and 16.18% at
December 31, 2006. Higher provisions in 2005 and 2006, relative to 2004,
reflected the higher amounts of loans classified as "special mention."
The estimation of the allowance for loan losses is inherently
subjective as it requires estimates and assumptions that are susceptible to
significant revisions as more information becomes available or as future events
change. Future additions to the allowance for loan losses may be necessary if
economic and other conditions in the future differ substantially from the
current operating environment. In addition, the Office of Thrift Supervision, as
an integral part of its examination process, periodically reviews our loan and
foreclosed real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. The Office of Thrift Supervision
may require the allowance for loan losses or the valuation allowance for
foreclosed real estate to be increased based on its review of information
available at the time of the examination, which would negatively affect our
earnings.
15
The following table sets forth information with respect to our
allowance for loan losses at the dates indicated.
For the Year Ended December 31,
-------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- --------- --------- --------- ----------
(Dollars in thousands)
Allowance balance (at beginning of period).... $ 878 $ 750 $ 702 $ 637 $ 637
-------- -------- ----- ---------- ---------
Provision for loan losses.................... 291 128 48 85 134
--------- --------- --------- ---------- ---------
Charge-offs:
Real estate mortgage - one-to-four family... - - - 20 134
--------- --------- --------- ---------- ---------
Total charge-offs....................... - - - 20 134
--------- --------- --------- ---------- ---------
Recoveries.................................... - - - - -
--------- --------- --------- ---------- ---------
Net (charge-offs) recoveries.................. - - - (20) (134)
--------- --------- --------- ---------- ---------
Allowance balance (at end of period).......... $ 1,169 $ 878 $ 750 $ 702 $ 637
========= ========= ========= ========== =========
Total loans outstanding....................... $ 430,080 $ 387,514 $ 341,612 $ 306,153 $ 260,204
========= ========= ========= ========== =========
Average loans outstanding..................... $ 400,486 $ 349,758 $ 318,154 $ 276,078 $ 255,469
========= ========= ========= ========== =========
Allowance for loan losses as a percent of
total loans outstanding.................... 0.27% 0.23% 0.22% 0.23% 0.24%
========= ========= ========= ========== ==========
Net loans charged off as a percent of
average loans outstanding.................. -% -% -% 0.01% 0.05%
========= ========= ========= ========== ==========
Allowance for loan losses to
non-performing loans....................... 322.04% 134.25% 95.30% 77.31% 57.75%
========= ========= ========= ========== ==========
16
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of our allowance for loan losses by loan category based on the
relative composition of loans in the portfolio and the percent of loans in each
category to total loans at the dates indicated. The portion of the loan loss
allowance allocated to each loan category does not represent the total available
for future losses which may occur within the loan category since the entire loan
loss allowance is a valuation reserve applicable to the aggregate loan
portfolio.
At December 31,
-----------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------------- ----------------- --------------- ----------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans Of Loans
to Total to Total to Total to Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ --------- ------ --------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
At end of period allocated to:
Real estate mortgage -
One-to-four family........... $ 238 48.31% $ 435 49.45% $ 442 58.95% $ 461 65.67% $ 428 67.16%
Real estate mortgage -
Multi-family and
commercial............... 746 15.31 122 13.84 93 12.42 61 8.68 29 4.55
Commercial business............ 5 0.87 5 0.61 4 0.48 3 0.39 1 0.13
Consumer:
Home equity and second
mortgage loans........... 133 29.63 268 30.53 191 25.40 167 23.86 175 27.52
Passbook or certificate...... 39 0.30 2 0.28 3 0.41 3 0.38 3 0.43
Auto......................... - 0.01 - 0.01 - 0.01 - 0.02 - -
Other........................ - - 1 0.12 1 0.15 1 0.17 1 0.21
Construction................... 15 5.57 45 5.16 16 2.17 6 0.85 - -
------ ------ ------ ------ ------ ------ ----- ------- ------ ------
Total allowance........... $1,169 100.00% $ 878 100.00% $ 750 100.00% $ 702 100.00% $ 637 100.00%
====== ====== ====== ====== ====== ====== ===== ====== ====== ======
17
Securities Portfolio
General. Our deposits have traditionally exceeded our loan
originations, and we have invested these excess deposits primarily in
mortgage-backed securities and investment securities.
Our investment policy is designed to foster earnings and manage cash
flows within prudent interest rate risk and credit risk guidelines. Generally,
our investment policy is to invest funds in various categories of securities and
maturities based upon our liquidity needs, asset/liability management policies,
pledging requirements, investment quality, marketability and performance
objectives. The Bank's investment policy specifies the responsibility for the
investment portfolio, asset/liability management and liquidity management and
establishes an oversight Investment Committee. The Investment Committee, which
is comprised of at least one Board member and the members of management
responsible for investment decisions and accountability, meets quarterly to
review the portfolio and performance risks and future purchasing strategies. The
investment officer is authorized to purchase securities to the limit of $5.0
million per trade per issue with the prior approval of the president, executive
vice president or investment committee.
All of our securities carry market risk insofar as increases in market
rates of interest may cause a decrease in their market value. Prior to
investing, consideration is given to the interest rate, tax considerations,
market volatility, yield, settlement date and maturity of the security, our
liquidity position, and anticipated cash needs and sources. The effect that the
proposed security would have on our credit and interest rate risk and risk-based
capital is also considered.
Federally chartered savings banks have the authority to invest in
various types of liquid assets. The investments authorized under the Bank's
investment policy include U.S. government and government agency obligations,
municipal securities (consisting of bond obligations of state and local
governments), mortgage-backed securities, collateralized mortgage obligations
and corporate bonds. On a short-term basis, our investment policy authorizes
investment in federal funds, certificates of deposits and money market
investments with insured institutions and with brokerage firms.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that securities be
categorized as "held to maturity," "trading securities" or "available-for-sale,"
based on management's intent as to the ultimate disposition of each security.
Statement No. 115 allows debt securities to be classified as "held to maturity"
and reported in financial statements at amortized cost only if the reporting
entity has the positive intent and ability to hold these securities to maturity.
Securities that might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, or other
similar factors cannot be classified as "held to maturity."
We do not currently use or maintain a trading account. Securities not
classified as "held to maturity" are classified as "available-for-sale." These
securities are reported at fair value, and unrealized gains and losses on the
securities are excluded from earnings and reported, net of deferred taxes, as a
separate component of equity.
At December 31, 2006 our securities portfolio did not contain
securities of any issuer, other than the U.S. government or its agencies, having
an aggregate book value in excess of 10% of our equity. We do not currently
participate in hedging programs, interest rate caps, floors or swaps, or other
activities involving the use of off-balance sheet derivative financial
instruments, however, we may in the future utilize such
18
instruments if we believe it would be beneficial for managing our interest rate
risk. Further, we do not purchase securities which are not rated investment
grade.
Actual maturities of the securities held by us may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without prepayment penalties. At December 31, 2006, we had
$38.9 million of callable securities, net of premiums and discounts, in our
portfolio. Callable securities pose reinvestment risk because we may not be able
to reinvest the proceeds from called securities at an equivalent or higher
interest rate.
Mortgage-backed Securities and Collateralized Mortgage Obligations.
Mortgage-related securities represent a participation interest in a pool of one-
to four-family or multi-family mortgages. We primarily invest in mortgage-backed
securities secured by one- to four-family mortgages. Our mortgage-related
securities portfolio includes mortgage-backed securities and collateralized
mortgage obligations issued by U.S. government agencies or government-sponsored
entities, such as Federal Home Loan Mortgage Corporation, the Government
National Mortgage Association, and the Federal National Mortgage Association. We
do not currently invest in mortgage-related securities issued by non-government,
private corporate issuers.
The mortgage originators use intermediaries (generally government
agencies and government-sponsored enterprises, but also a variety of private
corporate issuers) to pool and repackage the participation interests in the form
of securities, with investors such as us receiving the principal and interest
payments on the mortgages. Securities issued or sponsored by U.S. government
agencies and government-sponsored entities are guaranteed as to the payment of
principal and interest to investors. Privately issued non-government, corporate
issuers' securities typically offer rates above those paid on government agency
issued or sponsored securities, but lack the guaranty of those agencies and are
generally less liquid investments.
Mortgage-backed securities are pass-through securities typically issued
with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with interest rates that are within a specific range
and have varying maturities. The life of a mortgage-backed security thus
approximates the life of the underlying mortgages. Mortgage-backed securities
generally yield less than the mortgage loans underlying the securities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates.
Collateralized mortgage obligations are mortgage-derivative products
that aggregate pools of mortgages and mortgage-backed securities and create
different classes of securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage-backed securities as opposed to pass through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage-backed securities from which cash flow is
received and risk is shared pro rata by all securities holders, cash flows from
the mortgages and mortgage-backed securities underlying collateralized mortgage
obligations are paid in accordance with a predetermined priority to investors
holding various tranches of the securities or obligations. It is the Bank's
policy to buy mortgage-derivative products that have no more risk than the
underlying mortgages.
19
The following table sets forth the carrying value of our securities
portfolio at the dates indicated.
At December 31,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(In thousands)
Securities Available for Sale:
-----------------------------
Mutual fund shares ......................... $ 2,226 $ 2,154 $ 2,112 $ 1,036 $ 1,015
Equity securities .......................... 3,447 50 50 50 50
Mortgage-backed securities ................. 1,524 130 149 308 499
U.S. government obligations ................ 1,979 2,961 981 1,000 16,065
Obligations of state and political
subdivisions ........................... 10,155 10,219 10,251 11,650 12,568
-------- -------- -------- -------- --------
Total securities available for sale .. 19,331 15,514 13,543 14,044 30,197
-------- -------- -------- -------- --------
Investment Securities Held to Maturity:
--------------------------------------
U.S. government obligations ................ 168,332 172,263 159,257 151,889 96,495
Obligations of states and political
subdivisions ........................... 1,595 815 874 933 993
-------- -------- -------- -------- --------
Total investment securities
held to maturity ................ 169,927 173,078 160,131 152,822 97,488
-------- -------- -------- -------- --------
Mortgage-Backed Securities Held to Maturity:
-------------------------------------------
Government National Mortgage Association ... 5,630 7,454 9,167 9,457 14,668
Federal Home Loan Mortgage Corporation ..... 79,822 80,155 60,086 54,533 75,545
Federal National Mortgage Association ...... 53,880 58,389 63,913 64,944 56,656
Collateralized mortgage obligations ........ 5,148 4,103 5,140 6,333 --
-------- -------- -------- -------- --------
Total mortgage-backed securities
held to maturity ................. 144,480 150,101 138,306 135,267 146,869
-------- -------- -------- -------- --------
Total ..................................... $333,738 $338,693 $311,980 $302,133 $274,554
======== ======== ======== ======== ========
20
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of our securities
portfolio at December 31, 2006. This table shows contractual maturities and does
not reflect repricing or the effect of prepayments. Actual maturities may
differ.
At December 31, 2006
---------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
----------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- --------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
Mutual fund shares $ 2,226 4.49% $ - -% $ - -% $ - -% $ 2,226 4.49% $ 2,226
Equity securities 3,447 - - - - - - - 3,447 - 3,447
U.S. government obligations 57,996 2.82 61,289 4.19 551,026 5.36 - - 170,311 4.13 168,282
Obligations of states and
political subdivisions - - - - 4,214 4.42 7,536 4.43 11,750 4.41 11,786
Government National
Mortgage Association 8 7.00 184 6.95 - - 5,438 4.68 5,630 4.75 5,610
Federal Home Loan
Mortgage Corporation 29 7.39 1,202 4.41 17,394 5.10 62,721 4.96 81,346 4.98 80,503
Federal National Mortgage
Association 4 7.00 7,278 5.48 22,804 4.67 23,794 4.73 53,880 4.80 53,190
Collateralized Mortgage
Obligations - - - - 2,595 5.31 2,553 3.54 5,148 4.44 4,978
------- ------- ------- -------- -------- --------
Total $63,710 2.66% $69,953 4.35% $98,033 5.13% $102,042 4.84% $333,738 4.43% $330,022
======= ======= ======= ======== ======== ========
21
Sources of Funds
General. Deposits are the Bank's major source of funds for lending and
other investment purposes. In addition, we derive funds from loan and
mortgage-backed securities principal repayments, and proceeds from the maturity
and call of investment securities. Loan and securities payments are a relatively
stable source of funds, while deposit inflows are significantly influenced by
pricing strategies and money market conditions. If required, borrowings
(principally from the Federal Home Loan Bank) may be used to supplement the
amount of funds for lending and funding daily operations. Borrowings may also be
utilized as part of a leverage strategy in which the borrowings fund securities
purchases.
Deposits. Our current deposit products include checking and savings
accounts, certificates of deposit accounts ranging in terms from ninety-one days
to seven years, and individual retirement accounts. Deposit account terms vary,
primarily as to the required minimum balance amount, the amount of time that the
funds must remain on deposit and the applicable interest rate.
Deposits are obtained primarily from within New Jersey. Traditional
methods of advertising are used, or may be used, to attract new customers and
deposits, including radio, billboards, print media, direct mail and inserts
included with customer statements. We do not currently utilize the services of
deposit brokers. Premiums or incentives for opening accounts are sometimes
offered, and we periodically select particular certificate of deposit maturities
for promotion. The Bank has a tiered savings product that offers a beneficial
interest rate related to predetermined tiered balance requirements. Customers
that maintain a minimum balance requirement in the tiered account are not
charged a monthly service fee for the savings account or for checking accounts
and also receive overdraft protection, Visa check card and coin counting
services.
The determination of deposit and certificate interest rates is based
upon a number of factors, including: (1) need for funds based on loan demand,
current maturities of deposits and other cash flow needs; (2) a current survey
of a selected group of competitors' rates for similar products; (3) economic
conditions; and (4) business plan projections. Interest rates are reviewed
weekly at a meeting of the Asset Liability Committee which consists of senior
management.
A large percentage of our deposits are in certificates of deposit,
which totaled 50.6% of total deposits at December 31, 2006. The inflow of
certificates of deposit and the retention of such deposits upon maturity are
significantly influenced by general interest rates and money market conditions,
making certificates of deposit traditionally a more volatile source of funding
than core deposits. Our liquidity could be reduced if a significant amount of
certificates of deposit maturing within a short period of time were not renewed.
To the extent that such deposits do not remain with us, they may need to be
replaced with borrowings which could increase our cost of funds and negatively
impact our interest rate spread and our financial condition. Historically, a
significant portion of the certificates of deposit remain with us after they
mature and we believe that this will continue. At December 31, 2006, $74.1
million, or 23.4%, of our certificates of deposit were "jumbo" certificates of
$100 thousand or more.
22
The following tables set forth the distribution of average deposits for
the periods indicated and the weighted average nominal interest rates for each
period on each category of deposits presented.
For the Year Ended December 31,
--------------------------------------------------------------------------------------------------
2006 2005 2004
--------------------------------- -------------------------------- ------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Average of Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- -------- ------- -------- -------- ------- -------- ------
(Dollars in thousands)
Non-interest-bearing demand.... $ 25,653 4.0% 0.00% $ 15,844 2.58% 0.00% $ 12,613 2.25% 0.00%
Interest-bearing demand........ 94,204 14.6 0.54 100,241 16.31 0.48 95,251 17.02 0.37
Money market demand............ 99,929 15.5 0.90 114,364 18.61 0.97 119,919 21.42 0.79
Savings and club............... 108,435 16.8 0.75 105,004 17.09 0.85 107,191 19.15 0.69
Certificates of deposit........ 315,613 49.1 3.95 279,026 45.41 2.97 224,750 40.16 2.39
-------- ----- -------- ----- -------- -----
Total deposits.............. $643,834 100.00% 2.28% $614,479 100.00% 1.75% $559,724 100.00% 1.32%
======== ====== ======== ====== ======== ======
23
The following table sets forth certificates of deposit classified by
interest rate as of the dates indicated.
At December 31,
------------------------------------
Interest Rate 2006 2005 2004
------------- ---- ---- ----
(In thousands)
0.00-1.99% $ 1,536 $ 11,096 $123,439
2.00-2.99% 20,655 68,197 26,887
3.00-3.99% 71,116 152,801 47,611
4.00-4.99% 172,509 82,228 40,451
5.00% and above 50,844 - -
-------- -------- --------
Total $316,660 $314,322 $238,388
======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 2006.
Amount Due
-------------------------------------------------------------------------
Within After
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
------ --------- --------- --------- --------- ------- -----
(In thousands)
Interest Rate
-------------
0.00-1.99% $ 847 $ - $ - $ 675 $ 5 $ 9 $ 1,536
2.00-2.99% 15,388 5,267 - - - - 20,655
3.00-3.99% 40,167 21,917 9,032 - - - 71,116
4.00-4.99% 135,740 5,646 7,739 23,040 223 121 172,509
5.00-5.99% 45,672 93 213 - 4,866 - 50,844
-------- ------- ------- ------- ------ ------- --------
Total $237,814 $32,923 $16,984 $23,715 $5,094 $ 130 $316,660
======== ======= ======= ======= ====== ======= ========
The following table shows the amount of certificates of deposit of $100
thousand or more by time remaining until maturity as of the dates indicated.
At December 31, 2006
--------------------
Maturity Period (In thousands)
---------------
Within three months............................... $ 21,169
Three through six months.......................... 19,857
Six through twelve months......................... 14,006
Over twelve months................................ 19,102
---------
$ 74,134
=========
24
Borrowings. To supplement deposits as a source of funds for lending or
investment, the Bank may borrow funds in the form of advances from the Federal
Home Loan Bank. We traditionally have enjoyed cash flows from deposit activities
that were sufficient to meet our day-to-day funding obligations and in the past
only occasionally used our overnight line of credit or borrowing facility with
the Federal Home Loan Bank. In the third quarter of 2005, however, we used our
overnight line of credit at the Federal Home Loan Bank to meet daily operations.
In the fourth quarter of 2005, we took a five year advance from the Federal Home
Loan Bank to meet the strong demand for loans. At December 31, 2006, the Bank's
borrowing limit with the Federal Home Loan Bank was $159.3 million.
At December 31, 2006, the outstanding balance of the five year advance
from the Federal Home Loan Bank totaled $7.9 million. This advance has a fixed
interest rate of 4.49% and matures as follows:
Twelve Months Ending December 31,
---------------------------------
(In thousands)
2007..................................... $ 1,923
2008..................................... 2,011
2009..................................... 2,087
2010..................................... 1,842
--------
Total............................. $ 7,863
========
Short-term Federal Home Loan Bank advances generally have original
maturities of less than one year. Advances from the Federal Home Loan Bank are
typically secured by the Federal Home Loan Bank stock and by other assets,
mainly securities which are obligations of or guaranteed by the U.S. government.
Additional information regarding our borrowings is included under Note 9 to the
consolidated financial statements.
Subsidiary Activity
Roma Financial Corporation has no direct subsidiaries other than Roma
Bank. Roma Bank has two wholly-owned subsidiaries: Roma Capital Investment
Corporation, which was incorporated under New Jersey law in 2004 as an
investment subsidiary, and General Abstract & Title Agency, a New Jersey
corporation.
Roma Capital Investment Corporation is an investment subsidiary and its
sole activity is to hold investment securities. Its total assets at December 31,
2006 were $251.5 million. Its net income for 2006 was $6.8 million.
General Abstract & Title Agency sells title insurance, performs title
searches and provides real estate settlement and closing services. Its total
assets at December 31, 2006 were $537 thousand. Its operating revenue for 2006
consisted of $1.4 million in premiums earned from the placement of title
insurance and related title company services. Its net income for 2006 was $56
thousand.
Roma Financial Corporation is currently in the process of forming a de
novo savings bank for which it will be the 60% majority stockholder. The bank
will be called RomAsia Bank and is expected to open for business in the fourth
quarter of 2007.
25
REGULATION AND SUPERVISION
Set forth below is a brief description of certain laws which relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Holding Company Regulation
General. The Company is a unitary savings and loan holding company,
subject to regulation and supervision by the OTS. In addition, the OTS has
enforcement authority over the Company and any non-savings institution
subsidiaries. This permits the OTS to restrict or prohibit activities that it
determines to be a serious risk to Roma Bank. This regulation is intended
primarily for the protection of the depositors and not for the benefit of
stockholders of the Company.
Activities Restrictions. As a grandfathered unitary savings and loan
holding company under the GLB Act, the Company is generally not subject to any
restrictions on its business activities or those of its non-savings institution
subsidiaries. However, if the Company were to fail to meet the Qualified Thrift
Lender Test, then it would become subject to the activities restrictions of the
Home Owners' Loan Act applicable to multiple holding companies. See "Regulation
of the Bank -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
it would lose its grandfathered status under the GLB Act and its business
activities would be restricted to certain activities specified by OTS
regulation, which include performing services and holding properties used by a
savings institution subsidiary, certain activities authorized for savings and
loan holding companies as of March 5, 1987, and nonbanking activities
permissible for bank holding companies pursuant to the Bank Holding Company Act
of 1956 (the "BHC Act") or authorized for financial holding companies pursuant
to the GLB Act. Furthermore, no company may acquire control of the Company
unless the acquiring company was a unitary savings and loan holding company on
May 4, 1999 (or became a unitary savings and loan holding company pursuant to an
application pending as of that date) or the acquiring company is only engaged in
activities that are permitted for multiple savings and loan holding companies or
for financial holding companies under the BHC Act as amended by the GLB Act.
Mergers and Acquisitions. The Company must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings institution
or savings and loan holding company or acquiring such an institution or holding
company by merger, consolidation or purchase of its assets. In evaluating an
application for Roma Financial Corporation to acquire control of a savings
institution, the OTS would consider the financial and managerial resources and
future prospects of Roma Financial Corporation and the target institution, the
effect of the acquisition on the risk to the insurance funds, the convenience
and the needs of the community and competitive factors.
The USA Patriot Act. In response to the events of September 11, 2001,
the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act, was signed
into law on October 26, 2001. The USA Patriot Act gives the federal government
new powers to address terrorist threats through enhanced domestic security
measures, expanded surveillance powers, increased information sharing and
broadened anti-money laundering requirements. By way of amendments to the Bank
Secrecy Act, Title III of the USA Patriot Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
26
Among other requirements, Title III of the USA Patriot Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls; (ii) specific designation of an anti-money
laundering compliance officer; (iii) ongoing employee training programs; and
(iv) an independent audit function to test the anti-money laundering program.
o Section 326 authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue regulations that
provide for minimum standards with respect to customer identification at the
time new accounts are opened.
o Section 312 requires financial institutions that establish,
maintain, administer or manage private banking accounts or correspondence
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United States) to
establish appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures and controls designed to detect and report money
laundering.
o Effective December 25, 2001, financial institutions are
prohibited from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do not have a
physical presence in any country), and will be subject to certain record keeping
obligations with respect to correspondent accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Act")
implemented legislative reforms intended to address corporate and accounting
fraud and improve public company reporting. The Securities and Exchange
Commission (the "SEC") has promulgated new regulations pursuant to the Act and
may continue to propose additional implementing or clarifying regulations as
necessary in furtherance of the Act. The passage of the Act by Congress and the
implementation of new regulations by the SEC subject publicly-traded companies
to additional and more cumbersome reporting regulations and disclosure.
Compliance with the Act and corresponding regulations may increase the Company's
expenses.
Regulation of the Bank
General. As a federally chartered savings bank with deposits insured by
the FDIC, the Bank is subject to extensive regulation by the OTS and FDIC.
Lending activities and other investments must comply with federal and state
statutory and regulatory requirements. The Bank is also subject to reserve
requirements of the Federal Reserve System. Federal regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the Deposit Insurance
Fund and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes.
The OTS regularly examines the Bank and prepares reports for
consideration by the Bank's Board of Directors on deficiencies, if any, found in
the Bank's operations. The Bank's relationship with its depositors and borrowers
is also regulated by federal and state law, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents.
27
The Bank must file reports with the OTS concerning its activities and
financial condition, and must obtain regulatory approvals prior to entering into
certain transactions such as mergers with or acquisitions of other financial
institutions. Any change in such regulations, whether by the OTS, the FDIC or
the United States Congress, could have a material adverse impact on the Bank,
the Company, and their operations.
Deposit Insurance. The Bank's deposits are insured to applicable limits
by the Federal Deposit Insurance Company. Although the FDIC is authorized to
assess premiums under a risk-based system for such deposit insurance, most
insured depository institutions have not been required to pay premiums for the
last ten years. The Federal Deposit Insurance Reform Act of 2005, which was
signed into law on February 15, 2006, has resulted in significant changes to the
federal deposit insurance program: (i) effective March 31, 2006, the Bank
Insurance Fund (which formerly insured the deposits of banks) and the Savings
Association Insurance Fund (which formerly insured the deposits of savings
associations like the Bank) were merged into a new combined fund, called the
Deposit Insurance Fund; (ii) the current $100 thousand deposit insurance
coverage will be indexed for inflation (with adjustments every five years,
commencing January 1, 2011); and (iii) deposit insurance coverage for retirement
accounts has been increased to $250 thousand per participant subject to
adjustment for inflation. The FDIC has been given greater latitude in setting
the assessment rates for insured depository institutions, which could be used to
impose minimum assessments.
The FDIC is authorized to set the reserve ratio for the Deposit
Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits.
If the Deposit Insurance Fund's reserves exceed the designated reserve ratio,
the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%,
a portion of the excess as a dividend to insured depository institutions based
on the percentage of insured deposits held on December 31, 1996 adjusted for
subsequently paid premiums. Insured depository institutions that were in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future assessments based
on their past contributions to the BIF or the Savings Association Insurance
Fund.
Pursuant to the Reform Act, the FDIC has determined to maintain the
designated reserve ratio at its current 1.25%. The FDIC has also adopted a new
risk-based premium system that provides for quarterly assessments based on an
insured institution's ranking in one of four risk categories based on their
examination ratings and capital ratios. Beginning in 2007, well-capitalized
institutions with the CAMELS ratings of 1 or 2 will be grouped in Risk Category
I and will be assessed for deposit insurance at an annual rate of between five
and seven basis points with the assessment rate for an individual institution to
be determined according to a formula based on a weighted average of the
institution's individual CAMEL component ratings plus either five financial
ratios or the average ratings of its long-term debt. Institutions in Risk
Categories II, III and IV will be assessed at annual rates of 10, 28 and 43
basis points, respectively.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. The FICO assessment rates, which
are determined quarterly, averaged 0.0128% of insured deposits in fiscal 2006.
These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of adjusted total assets, (2) Tier 1, or "core," capital equal to at
least 4% (3% if the institution has received the highest rating, "composite 1
CAMELS,"
28
on its most recent examination) of adjusted total assets, and (3) risk-based
capital equal to 8% of total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights, certain investments and unrealized gains and losses
on certain available-for-sale securities.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses (up to a maximum of 1.25% of
risk-weighted assets) and up to 45% of unrealized gains on equity securities.
Overall, supplementary capital is limited to 100% of core capital. A savings
association must calculate its risk-weighted assets by multiplying each asset
and off-balance sheet item by various risk factors as determined by the OTS,
which range from 0% for cash to 100% for delinquent loans, property acquired
through foreclosure, commercial loans, and other assets.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank, must file an application or a notice with the
OTS at least 30 days before making a capital distribution. A savings association
is not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) it is eligible for expedited treatment under OTS regulations, (2) it would
remain adequately capitalized after the distribution, (3) the annual amount of
its capital distributions does not exceed net income for that year to date added
to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
In addition, the OTS could prohibit a proposed capital distribution if,
after making the distribution, which would otherwise be permitted by the
regulation, the OTS determines that the distribution would constitute an unsafe
or unsound practice.
A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the institution would be unable
to meet any one of its minimum regulatory capital requirements. Further, a
federal savings institution cannot distribute regulatory capital that is needed
for its liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender ("QTL") test or they become subject to the business
activity restrictions and branching rules applicable to national banks. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code by maintaining at
least 60% of its total assets in specified types of assets, including cash,
certain government securities, loans secured by and other assets related to
29
residential real property, educational loans and investments in premises of the
institution or (ii) satisfy the statutory QTL test set forth in the Home Owners'
Loan Act by maintaining at least 65% of its "portfolio assets" in certain
"Qualified Thrift Investments" (defined to include residential mortgages and
related equity investments, certain mortgage-related securities, small business
loans, student loans and credit card loans, and 50% of certain community
development loans). For purposes of the statutory QTL test, portfolio assets are
defined as total assets minus intangible assets, property used by the
institution in conducting its business, and liquid assets up to 20% of total
assets. A savings institution must maintain its status as a QTL on a monthly
basis in at least nine out of every 12 months. As of December 31, 2006, the Bank
was in compliance with its QTL requirement.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year, or 5% of its outstanding advances.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 2006, the Bank was in compliance with these requirements.
Item 1A. Risk Factors
The following is a summary of the material risks related to an investment in the
Company's securities.
We realize income primarily from the difference between interest earned on loans
and investments and interest paid on deposits and borrowings, and changes in
interest rates may adversely affect our net interest rate spread and net
interest margin, which will hurt our earnings.
We derive our income mainly from the difference or "spread" between the
interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities. In
general, the larger the spread, the more we earn. When market rates of interest
change, the interest we receive on our assets and the interest we pay on our
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income.
Market interest rates were in recent years at historically low levels.
However, beginning in June 2004, the U.S. Federal Reserve has increased its
target federal funds rate. While the federal funds rate and other short-term
market interest rates, which we use as a guide to our deposit pricing, have
increased, intermediate- and long-term market interest rates, which we use as a
guide to our loan pricing, have not increased proportionately. This has led to a
"flattening" of the market yield curve, which has even "inverted" recently as
short-term rates have exceeded long-term rates over an intermediate maturity
horizon. The flat yield curve has hurt our interest rate spread and net interest
margin because the interest rates we
30
pay on our deposits have repriced upwards faster than the interest rates that we
earn on our loans and investments. If short-term interest rates continue to rise
so that the yield curve remains relatively flat or inverts further, we would
expect that our net interest spread and net interest margin would continue to
compress, which would hurt our net interest income.
Interest rates also affect how much money we can lend. For example,
when interest rates rise, the cost of borrowing increases and loan originations
tend to decrease. In addition, changes in interest rates can affect the average
life of loans and investment securities. A reduction in interest rates generally
results in increased prepayments of loans and mortgage-backed securities, as
borrowers refinance their debt in order to reduce their borrowing cost. This
causes reinvestment risk, because we generally are not able to reinvest
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. A falling rate environment would result in a decrease in
rates we pay on deposits and borrowings, but the decrease in the cost of our
funds may not be as great as the decrease in the yields on our loan portfolio
and mortgage-backed securities and loan portfolios. This could cause a narrowing
of our net interest rate spread and could cause a decrease in our earnings.
Changes in market interest rates could also reduce the value of our financial
assets. If we are unsuccessful in managing the effects of changes in interest
rates, our financial condition and results of operations could suffer.
If we experience loan losses in excess of our allowance, our earnings will be
adversely affected.
The risk of credit losses on loans varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the value and marketability of the collateral for the loan. Management
maintains an allowance for loan losses based upon historical experience, an
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality. If management's assumptions and judgments about the ultimate
collectibility of the loan portfolio prove to be incorrect and the allowance for
loan losses is inadequate to absorb future losses or if we are required to make
material additions to the allowance, our earnings and capital could be
significantly and adversely affected. As of December 31, 2006, our allowance for
loan losses was $1.2 million, representing 0.27% of outstanding loans and
322.04% of non-performing loans.
A portion of our total loan portfolio consists of commercial real estate loans,
commercial business loans and construction loans, and we intend to grow this
part of the loan portfolio. The repayment risk related to these types of loans
is considered to be greater than the risk related to one- to four-family
residential loans.
At December 31, 2006, our loan portfolio included $65.8 million of
commercial and multi-family real estate loans and $3.7 million of commercial
business loans, together amounting to 16.2% of our total loan portfolio, and
$24.0 million of construction loans, representing 5.6% of our total loan
portfolio. Unlike single family residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment from his or her
employment and other income, and which are secured by real property with values
that tend to be more easily ascertainable, commercial loans typically are made
on the basis of the borrower's ability to make repayment from the cash flow of
the borrowers' business. The repayment of construction loans for residential and
commercial land acquisition and development, including loans to builders and
developers, is dependent, in part, on the success of the ultimate construction
project. In addition, commercial loans and construction loans to builders and
developers generally result in larger balances to single borrowers, or related
groups of borrowers, than one- to four-family loans.
31
In addition, the growth of our aggregate commercial and multi-family
real estate and commercial business loans and construction loans from $6.9
million at December 31, 2001 to $81.5 million at December 31, 2006 means that a
large portion of this portfolio is unseasoned. Relatively new loans that are
"unseasoned," are considered to pose a potentially greater repayment risk than
more mature loans because they generally do not have sufficient repayment
history to indicate the likelihood of repayment in accordance with their terms.
Strong competition within our market area may limit our growth and
profitability.
Competition in the banking and financial services industry in New
Jersey is intense. Many of our competitors have substantially greater resources
and lending limits than we do and offer services that we do not or cannot
provide. Price competition for loans might result in us originating fewer loans,
or earning less on our loans, and price competition for deposits might result in
a decrease in our total deposits or higher rates on our deposits. Our deposit
market share in Mercer County, New Jersey, where seven of our nine offices are
located, was 7.2% at June 30, 2006, the latest date for which market share
information is available.
Our business is geographically concentrated in New Jersey, and a downturn in
conditions in the state could have an adverse impact on our profitability.
A substantial majority of our loans are to individuals and businesses
in New Jersey. Any decline in the economy of the state could have an adverse
impact on our earnings. Adverse changes in the economy may also have a negative
effect on the ability of our borrowers to make timely repayments of their loans.
Additionally, because we have a significant amount of real estate loans,
decreases in local real estate values could adversely affect the value of
property used as collateral. If we are required to liquidate a significant
amount of collateral during a period of reduced real estate values to satisfy
the debt, our earnings and capital could be adversely affected.
We intend to actively consider opportunities for de novo branching. Costs
related to expansion plans may negatively impact earnings in future periods.
We opened our new main office in Robbinsville, New Jersey in 2005 and a
new branch office in Plumsted, New Jersey in the first quarter of 2007. We
intend to continue expanding our branch network. Expenses related to the planned
expansion of our operations through de novo branching or the acquisition of
branches or other financial institutions could adversely impact earnings in
future periods.
We operate in a highly regulated environment and may be adversely affected by
changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by
the Office of Thrift Supervision, our chartering authority, and by the Federal
Deposit Insurance Corporation, as insurer of our deposits. As a federally
chartered holding company, the Company is subject to regulation and oversight by
the Office of Thrift Supervision. Such regulation and supervision govern the
activities in which an institution and its holding companies may engage and are
intended primarily for the protection of the insurance fund and depositors.
Regulatory authorities have extensive discretion in connection with their
supervisory and enforcement activities, including the imposition of restrictions
on the operation of an institution, the classification of assets by the
institution and the adequacy of an institution's allowance for loan losses. Any
change in such regulation and oversight, whether in the form of regulatory
policy, regulations, or legislation, including changes in the regulations
governing mutual holding companies, could have a material impact on us and our
operations.
32
Item 1B. Unresolved Staff Comments
----------------------------------
Not applicable.
Item 2. Properties
-------------------
At December 31, 2006, our net investment in property and equipment
totaled $30.7 million, including land held for future development and
construction in progress.
The following table sets forth the location of our main office and
branch offices, the year each office was opened and the net book value of each
office.
Year Facility Leased or Net Book Value at
Office Location Opened Owned December 31, 2006
--------------- ------ ----- -----------------
(In thousands)
Corporate Headquarters and 2005 Owned $14,542
Washington Town Center Office:
2300 Route 33
Robbinsville, NJ
Chambersburg Office: 1962 Owned 309
485 Hamilton Avenue
Trenton, NJ
Mercerville Office: 1971 Owned 815
500 Route 33
Mercerville, NJ
Yardville Office: 1984 Owned 842
4500 South Broad Street
Yardville, NJ
West Trenton Office: 1986 Owned 959
79 West Upper Ferry Road
West Trenton, NJ
Hamilton Center City Office: 1991 Owned 4,037
1155 Whitehorse-Mercerville Road
Hamilton, NJ
South Trenton Office: 1993 Owned 745
1450 South Broad Street
Trenton, NJ
Florence Township Office: 2003 Owned 2,523
2150 Route 130 North
Florence Township
Burlington, NJ
Plumsted Office: 2007 Owned 2,351
400 Route 539
Cream Ridge, NJ
Item 3. Legal Proceedings
--------------------------
Roma Bank, from time to time, is a party to routine litigation which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which we hold security interests,
claims involving the making and servicing of real property loans, and other
issues incident to our business. There were no lawsuits pending or known to be
contemplated against Roma Financial Corporation or Roma Bank at December 31,
2006 that would have a material effect on our operations or income.
33
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2006.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
--------------------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------
Upon completion of the Company's minority stock offering in July of
2006, the Company's common stock commenced trading on The NASDAQ Stock Market
under the symbol "ROMA". The table below shows the reported high and low closing
prices of common stock during the periods indicated. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not represent actual transactions.
2006 High Low Dividends
----------------------------------------------------------------------------
Quarter ended September 30, 2006 (1) $ 15.94 $ 10.00 N/A
Quarter ended December 31, 2006 $ 16.56 $ 14.63 N/A
(1) Minority stock offering completed July 11, 2006 and trading commenced July
12, 2006.
Declarations of dividends by the Board of Directors depend on a number
of factors, including investment opportunities, growth objectives, financial
condition, profitability, tax considerations, minimum capital requirements,
regulatory limitations, stock market characteristics and general economic
conditions. The timing, frequency and amount of dividends is determined by the
Board.
As of March 1, 2007, there were approximately 4,222 shareholders of
record of the Company's common stock, including brokerage firms, banks and
registered clearing agents acting as nominees for an indeterminate number of
beneficial owners.
The Company did not have any stock repurchases in the year ended
December 31, 2006.
The Company's common stock commenced trading during the third quarter
of the year ended December 31, 2006. A stock performance graph is not presented
in this Form 10-K in light of this short trading history.
34
Item 6. Selected Financial Data
--------------------------------
The following financial information and other data in this section is
derived from the Company's audited consolidated financial statements and should
be read together therewith.
At December 31,
---------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Total assets $ 876,081 $ 797,760 $ 711,815 $ 671,728 $ 629.460
Loans receivable, net 420,382 378,708 335,250 303,833 258,645
Mortgage backed securities
held to maturity 144,480 150,101 138,306 135,267 146,869
Securities available for sale 19,331 15,514 13,543 14,044 30,197
Investment securities held to maturity 169,927 173,078 160,131 152,822 97,488
Cash and cash equivalents 64,701 28,089 19,944 28,218 65,418
Goodwill 572 572 - - -
Deposits 625,972 643,813 576,300 544,605 510,016
Federal Home Loan Bank borrowings 7,863 9,702 - - -
Total stockholders' equity 234,654 138,658 131,393 123,818 116,125
At December 31,
-----------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(In thousands)
Summary of Operations:
Interest income $40,869 $34,632 $31,148 $31,430 $35,740
Interest expense 15,190 10,901 7,392 8,287 12,181
------- ------- ------- ------- -------
Net interest income 25,679 23,731 23,756 23,143 23,559
Provision for loan losses 291 128 48 85 134
------- ------- ------- ------- -------
Net interest income after provision for
loan losses 25,388 23,603 23,708 23,058 23,425
Non-interest income 3,460 2,916 1,571 1,630 791
Non-interest expense 21,206 15,132 13,411 12,544 11,806
------- ------- ------- ------- -------
Income before income taxes 7,642 11,387 11,868 12,144 12,410
Provisions for income taxes 2,394 3,852 4,256 4,437 4,703
------- ------- ------- ------- -------
Net income $ 5,248 $ 7,535 $ 7,612 $ 7,707 $ 7,707
======= ======= ======= ======= =======
Net income per share -
basic and diluted $0.19 $0.33 $ 0.33 $0.34 $ 0.34
======= ======= ======= ======= =======
Weighted number of common
shares outstanding 27,305 22,584 22,584 22,584 22,584
======= ======= ======= ======= =======
35
At December 31,
-----------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(In thousands)
Performance Ratios:
Return on average assets (net income
divided by average total assets 0.62% 0.99% 1.10% 1.18% 1.27%
Return on average equity (net income
divided by average equity) 2.89 5.55 6.02 6.38 6.87
Net interest rate spread 2.780 3.09 3.44 3.48 3.79
Net interest margin on average
interest-earning assets 3.28 3.36 3.65 3.74 4.04
Average interest-earning assets to average
interest-bearing liabilities 1.24x 1.17x 1.19x 1.19x 1.20x
Efficiency ratio (Non-interest expense
divided by the sum of net interest
income and non-interest income) 72.78% 55.71% 51.69% 49.06% 48.23%
Non-interest expense to average assets 2.52 1.91 1.85 1.81 2.10
Asset Quality Ratios:
Non-performing loans to total loans 0.08 0.17 0.23 0.30 0.42
Non-performing assets to total assets 0.04 0.08 0.11 0.14 0.20
Net charge-offs to average loans
outstanding - - - 0.01 0.05
Allowance for loan losses to total loans 0.27 0.23 0.22 0.23 0.24
Allowance for loan losses to
non-performing loans 322.04 134.25 95.30 77.31 57.75
Capital Ratios:
Average equity to average assets
(average equity divided by average
total assets 21.53 17.90 18.33 18.45 18.49
Equity to assets at period end 26.78 17.38 18.46 18.43 18.45
Tangible equity to tangible assets
at period end 26.91 17.22 18.45 18.42 18.43
Number of Offices:
Offices 9 8 7 7 6
36
Item 7. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
General
This discussion and analysis reflects Roma Financial Corporation's
consolidated financial statements and other relevant statistical data. We
include it to enhance your understanding of our financial condition and results
of operation. You should read the information in this section in conjunction
with Roma Financial Corporation's consolidated financial statements and notes
thereto contained in this Annual Report on Form 10-K, and other statistical data
provided herein.
Overview
Financial Condition and Results of Operations. Roma Financial
Corporation's results of operations depend primarily on its net interest income.
Net interest income is the difference between the interest income we earn on our
interest-earnings assets and the interest we pay on our interest-bearing
liabilities. It is a function of the average balances of loans and investments
versus average balances of deposits and borrowed funds outstanding in any one
period and the yields earned on those loans and investments and the cost of
those deposits and borrowed funds.
Our interest-earning assets primarily consist of loans, mortgage-backed
securities and investment securities. At December 31, 2006, total loans
comprised 48% of our total assets and our securities portfolio comprised 38% of
our total assets. The most significant change in interest-earnings assets from
the prior year was a $50.7 million 14.5% increase in the average balance of
loans receivable, net from $349.8 million for 2005 to $400.5 million for 2006.
At year end, loans receivable, net totaled $420.4 million. During 2006, a key
goal of management was growth in the loan portfolio, particularly multi-family
and commercial real estate loans which increased by 22.8% to $65.8 million at
year end from $53.6 million at the end of 2005.
Proceeds of approximately $96.1 million from our initial public
offering completed in July 2006 funded the growth in the loan portfolio. To the
extent not yet deployed into loans and other assets, some of the offering
proceeds were invested into short-term interest bearing deposits, contributing
to a $36.6 million, or 130.2% increase in cash and cash equivalents.
Our interest-bearing liabilities consist primarily of retail deposits
and borrowings from the Federal Home Loan Bank of New York. At December 31,
2006, our total deposits were $626.0 million, compared to $643.8 million at
December 31, 2005. Our borrowings from the Federal Home Loan Bank of New York
were $7.9 million compared to $9.7 million a year earlier. The $17.8 million, or
2.7% decrease in deposits was primarily due to $15.0 million of deposits used by
depositors to purchase stock in our initial public offering. Management was
challenged during the year to balance the rate of attrition while containing
increases in the cost of funds. Management was successful in increasing
non-interest bearing checking deposits during the year, which totaled $25.1
million at December 31, 2006 compared to $20.7 million a year earlier. The
decrease in total deposits occurred primarily in the savings and club accounts
category which fell by $22.2 million. The nominal decrease in Federal Home Loan
Bank advances resulted from scheduled repayments of principal.
Our net interest income increased 7.6% to $25.7 million in 2006 from
$23.7 million in 2005. The net interest spread decreased to 2.80% from 3.09% in
2005, as the average cost of interest-bearing liabilities climbed 61 basis
points, while the average yield on interest-earning assets improved only 32
basis points. For 2006, the average cost of interest bearing-liabilities was
2.42% and the average yield on interest-earning assets was 5.22%. Total interest
income increased 17.6% due to a 10.8% increase in the average balance of
37
interest-earning assets and a 32 basis point increase in average yield, while
total interest expense increased 36.9%, primarily due to a 61 basis point
increase in the average cost of interest-bearing liabilities. Net interest
income increased due to the reinvestment of maturing securities and the
deployment of initial public offering proceeds into higher yielding securities
and loans as well as into cash and cash equivalents offering higher prevailing
yields resulting from increased short term interest rates.
Our results of operations are also influenced by our provision for loan
losses, non-interest income and non-interest expense. Non-interest income
includes service fees and charges, including income generated by the Bank's
retail branch network and operations, income from bank-owned-life-insurance and
title insurance revenue from our title agency subsidiary. Non-interest expense
includes salaries and employee benefits, occupancy expenses and other general
and administrative expenses. Non-interest expense increased by $6.1 million or
41.7% to $21.2 million in 2006 compared to $15.1 million in 2005. The increase
was due primarily to a $2.4 million increase in salaries and benefits, net
occupancy costs and equipment related to the opening of our new corporate
headquarters in September of 2005, and a $3.4 million contribution to the Roma
Bank Community Foundation, Inc. (the "Foundation") in connection with the
initial public offering.
Net income for the year ended December 31, 2006 was $5.2 million, a
decrease of $2.3 million or 30.7% from $7.5 million for the year ended December
31, 2005. The decrease related primarily to the contribution to the Foundation.
The Foundation was established to further our long-term commitment to the
communities that we serve. This one time, substantial, funding of the Foundation
will help to ensure that community reinvestment previously done by the Bank will
continue for years to come through the Foundation.
Total assets increased $78.3 million or 9.8%, to $876.1 million from
$797.8 million at December 31, 2005. Cash and cash equivalents increased $36.6
million from year to year due to the added liquidity and availability of funds
from the proceeds from our initial public offering. Securities available for
sale increased $3.8 million to $19.3 million from $15.5 million the prior year.
Investments and mortgage-backed securities held to maturity decreased $3.2
million and $5.6 million, respectively, reflecting the deployment of the
proceeds from maturating securities and monthly principal payments on loans,
into loan originations, and reinvestment in short term overnight investments.
Stockholders' equity increased $96.0 million or 69.2% to $234.7 million
primarily due to net proceeds of $91.3 million from our initial public offering,
offset by a reduction in equity for unallocated shares held by the employee
stock ownership plan. The decrease of $900 thousand in other comprehensive
income was primarily due to an after tax charge of $800 thousand from the
initial application of FASB 158, which recognizes prior unrecorded pension
transition and service costs and unrealized losses.
38
Business Strategy. Our current business strategy is to seek growth and
improve profitability by:
o Increasing the volume of loan originations and the size of loan
portfolio relative to our securities portfolio;
o Increasing originations of multi-family and commercial real
estate loans, construction loans, and commercial business loans;
o Building core banking business through internal growth and de
novo branching, as well as de novo banking, and judiciously
considering expansion through acquisition opportunities.
o Developing a sales culture by training and encouraging branch
personnel to promote existing products and services to our
customers; and
o Maintaining high asset quality.
Historically, our deposits have exceeded our residential loan
originations, and we have invested those deposits primarily in mortgage-back
securities and investment securities. Over the last few years we have focused on
building a non-residential loan portfolio.
39
Critical Accounting Policies
Our accounting policies are integral to understanding the results
reported and are described in detail in Note 1 to consolidated financial
statements contained in this Annual Report on Form 10-K. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates of the consolidated statements of financial condition and income for the
periods then ended. 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.
Allowance for Loan Losses. The allowance for loan losses represents our
best estimate of losses known and inherent in our loan portfolio that are both
probable and reasonable to estimate. In determining the amount of the allowance
for loan losses, we consider the losses inherent in our loan portfolio and
changes in the nature and volume of our loan activities, along with general
economic and real estate market conditions. We utilize a segmented approach
which identifies: (1) impaired loans for which specific reserves are
established; (2) classified loans for which a higher allowance is established;
and (3) performing loans for which a general valuation allowance is established.
We maintain a loan review system which provides for a systematic review of the
loan portfolios and the early identification of impaired loans. The review of
residential real estate and home equity consumer loans, as well as other more
complex loans, is triggered by identified evaluation factors, including
delinquency status, size of loan, type of collateral and the financial condition
of the borrower. All commercial loans are evaluated individually for impairment.
Specific loan loss allowances are established for impaired loans based on a
review of such information and/or appraisals of the underlying collateral.
General loan loss allowances are based upon a combination of factors including,
but not limited to, actual loan loss experience, composition of the loan
portfolio, current economic conditions and management's judgment.
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events, and as such, further provisions for loan losses may be necessary
in order to increase the level of the allowance for loan losses. For example,
our evaluation of the allowance includes consideration of current economic
conditions, and a change in economic conditions could reduce the ability of
borrowers to make timely repayments of their loans. This could result in
increased delinquencies and increased non-performing loans, and thus a need to
make increased provisions to the allowance for loan losses. Any such increase in
provisions would result in a reduction to our earnings. A change in economic
conditions could also adversely affect the value of properties collateralizing
real estate loans, resulting in increased charges against the allowance and
reduced recoveries, and require increased provisions to the allowance for loan
losses. Furthermore, a change in the composition, or growth, of our loan
portfolio could result in the need for additional provisions.
Comparison of Financial Condition at December 31, 2006 and December 31, 2005
General. Our total assets increased $78.3 million or 9.8% to $876.1
million at December 31, 2006 compared to $797.8 million at December 31, 2005,
primarily due to increases in cash and cash equivalents and loan receivable,
net.
Cash and Cash Equivalents. Cash and cash equivalents increased $36.6
million or 130.2% to $64.7 million at December 31, 2006 from $28.1 million at
December 31, 2005. Cash received in our initial public offering in excess of
funds utilized for loan originations was primarily invested in cash and cash
equivalents.
40
Securities available for sale. The carrying value of securities
available for sale increased $3.8 million or 24.5% to $19.3 million at December
31, 2006, compared to $15.5 million the prior year.
Investment securities held to maturity. Investment securities held to
maturity decreased $3.2 million, or 1.8% to $169.9 million at December 31, 2006
from $173.1 million at December 31, 2005. The reduction in the investments held
to maturity portfolio resulted from scheduled maturities that were used to fund
loan growth. The weighted average yield of the portfolio was 3.66%.
Mortgage-backed securities. Mortgage-backed securities held to maturity
decreased $5.6 million, or 3.7% to $144.5 million at December 31, 2006 compared
to $150.1 million in the prior year. Management utilized the cash flows from
monthly principal and interest payments and maturities to fund loan
originations, and to the extent needed, deposit outflow. During this period of
flat to inverted yield curves management invested in short duration securities
with some callable features. The average yield on mortgage-back securities at
December 31, 2006 was 4.85%.
Loans. Loans receivable, net, increased $41.7 million, or 11.0% to
$420.4 million at December 31, 2006 from $378.7 million at December 31, 2005.
Conventional one-to-four family mortgage loans increased $16.2 million or 8.5%
to $207.8 million at December 31, 2006 compared to $191.6 million the prior
year. Loans in this category increased primarily because of a mortgage promotion
in March. Demand for mortgage loans continued to be slow during 2006. Home
equity and consumer loans increased $8.9 million, or 7.4% to $128.8 million at
December 31, 2006 from $119.9 million at December 31, 2005. Equity loan activity
slowed in 2006 compared to very robust activity in 2005. Commercial and
multi-family mortgages, construction and commercial loans increased in the
aggregate $17.5 million, or 23.0% to $93.5 million at December 31, 2006,
compared to $76.0 million at December 31, 2005.
Premises and equipment. Premises and equipment increased $2.0 million,
or 7.0% to $30.7 million at December 31, 2006 compared to $28.7 million at
December 31, 2005. The increase resulted primarily from the cost associated with
completing a new branch, located in Ocean County, New Jersey. That location
opened in January 2007, bringing our total network to eight branch locations
plus our Robbinsville main office.
Bank Owned Life Insurance. Bank-owned-life-insurance ("BOLI") increased
$600 thousand to $16.2 million at December 31, 2006 compared to $15.6 million
the prior year. There were no additional investments in BOLI policies during
2006.
Other assets. Other assets increased $1.6 million or 57.1% to $4.4
million at December 31, 2006, compared to $2.8 million a year earlier, primarily
because of the increase in deferred tax assets attributable to the initial
application of SFAS 158. SFAS 158 requires the Company to recognize prior
pension transition and service costs and unrealized losses that had not
previously been recorded. Deferred tax assets also were increased because of the
carry forward charitable contribution deduction relating to the contribution to
the Foundation.
41
Deposits. Deposits decreased $17.8 million or 2.8% to $626.0 million at
December 31, 2006, compared to $643.8 million at December 31, 2005. This
decrease was primarily due to depositors utilizing $15.0 million of deposits at
Roma Bank to purchase stock in our initial public offering. Non-interest bearing
deposits increased $4.4 million, or 21.2% to $25.1 million at December 31, 2006,
compared to $20.7 million in the prior year. Interest bearing checking accounts
decreased $2.4 million or 2.4% to $98.3 million at December 31, 2006, compared
to $100.7 million a year earlier. The weighted average interest rate of total
checking accounts, including both interest bearing and non-interest bearing, was
0.42% at December 31, 2006, compared to 0.45% the prior year. Savings and club
accounts decreased $22.2 million or 10.7% to $185.9 million at December 31,
2006, compared to $208.1 million a year earlier. The weighted average interest
rate on savings and club accounts decreased to 0.82% compared to 0.91% in the
prior year. Certificates of deposit increased $2.4 million, or 0.7% to $316.7
million at December 31, 2006, compared to $314.3 million at December 31, 2005.
The weighted average interest rate on certificates of deposit increased 82 basis
points to 4.30% at December 31,2006 compared to 3.48% at the prior year end. The
weighted average nominal rate on total deposits increased 45 basis points to
2.53% compared to 2.08% in the prior year. Fierce competition in our marketplace
for core deposits contributed to the decrease in savings and club accounts.
Management has marketed special certificates of deposits with promotional
interest rates typically with terms of 91 days, six and ten months, and one year
maturities to retain and attract new deposits The challenge for management in
2006 was to balance the rate of attrition for all deposits categories against a
significant increase in the cost of funds.
Federal Home Loan Bank. Federal Home Loan Bank of New York advances
decreased $1.8 million to $7.9 million at December 31, 2006, compared to $9.7
million in the prior year, as a result of scheduled monthly principal payments.
Other Liabilities. Other liabilities increased $1.8 million to $5.3
million at December 31, 2006 compared to $3.5 million at December 31, 2005. The
increase was primarily due to a $1.3 million liability recorded to reflect the
initial application of FASB 158, which recognizes prior unrecorded pension
transition and service costs and unrealized losses.
Stockholders' equity. Stockholders' equity increased $96.0 million or
69.2% to $234.7 million at December 31, 2006 compared to $138.7 million in the
prior year due primarily to net proceeds from the initial public offering and
net income of $5.2 million. The decrease in other comprehensive income was
primarily due to the initial application of FASB 158 of $800 thousand.
Comparison of Operating Results for the Years Ended December 31, 2006 and
December 31, 2005
General. Net income for the year ended December 31, 2006 was $5.2
million, a decrease of $2.3 million or 30.7%, from $7.5 million for the year
ended December 31, 2005. The decrease related primarily to the $3.4 million
contribution that the Company made to the Foundation. The increase of $1.9
million in net interest income and $544 thousand in non-interest income was
offset by a $6.1 million increase in non-interest expense, which included the
contribution to the Foundation.
Net Interest Income. Net interest income increased $1.9 million or 7.6%
to $25.7 million for the year ended December 31, 2006, compared to $23.7 million
in the prior year. Our net interest rate spread decreased 29 basis points to
2.80%, compared to 3.09% the prior year. Despite a 32 basis point improvement in
the average yield on interest-earning assets, which increased to 5.22% this year
from 4.90% last year, the net interest rate spread decreased due to a 61 basis
point increase in the average cost of interest-bearing liabilities to 2.42% this
year compared to 1.81% last year.
42
Interest Income. Total interest income increased $6.2 million or 17.6%
to $40.9 million, compared to $34.6 million in the prior year. The improvement
in interest income resulted from an increase in the yield on average
interest-earning assets as well as an increase in the average balance of
interest-earning assets.
Interest income on loans increased $4.1 million, or 19.8% to $24.7
million for the year ended December 31, 2006, compared to $20.7 million in the
prior year. The increase resulted from both an increase of 27 basis points in
average loan yield to 6.18% and an increase in the average balance of loans from
$349.8 million to $400.5 million, an increase of $50.7 million year over year.
Interest income on mortgage-backed securities held to maturity
increased minimally and was $7.2 million both years. The average yield on
mortgage-back securities held to maturity increased 10 basis points to 4.85%
compared to 4.75% the prior year. This was offset by a decrease of $2.9 million
in the average balance of mortgage-backed securities held to maturity to $147.7
million, compared to $150.6 million the prior year.
Interest income on investment securities available for sale and held to
maturity increased $900 thousand, or 13.8%, to $7.0 million, compared to $6.1
million in the prior year. The average yield on investment securities available
for sale and held to maturity increased 28 basis points to 3.62%, compared to
3.34% the prior year. The average balance of investment securities available for
sale and held to maturity increased $9.1 million to $192.5 million, at December
31, 2006, compared to $183.4 million the prior year.
Interest income on other interest-earning assets increased $1.3 million
or 190.0% to $2.0 million, compared to $700 thousand in the prior year. The
increase was primarily due to the investment of a portion of the proceeds from
our initial public offering in interest-bearing deposits in other banks. The
average balance of other interest-earning assets increased $19.3 million or
85.4% to $41.9 million for 2006, compared to $22.6 million in the prior year.
The increase was also due to a 171 basis point increase in the average yield on
other interest-earning assets to 4.73% compared to 3.02% last year resulting
from an increase in short term interest rates.
Interest Expense. Total interest expense increased $4.3 million or
39.3% to $15.2 million for the year ended December 31, 2006, compared to $10.9
million for the year ended December 31, 2005. The increase resulted from an
increase in the average cost of interest-bearing liabilities as well as an
increase in the balance of average interest-bearing liabilities from year to
year. The average cost of interest-bearing liabilities increased 61 basis points
to 2.42% for the year ended December 31, 2006 compared to 1.81% in the prior
year. The average balance of interest-bearing liabilities increased $26.4
million or 4.4% to $628.7 million in 2006, compared to $602.3 million in the
prior year.
Interest expense on deposits increased $4.0 million or 36.9% to $14.7
million in 2006, compared to $10.7 million in 2005. Average interest-bearing
demand deposits decreased $6.0 million to $94.2 million while their average cost
increased 6 basis points to 0.54%. Average savings and club accounts decreased
$11.0 million or 5.0% to $208.4 million compared to $219.4 million in the prior
year. The average cost of savings and club accounts decreased 9 basis points to
0.82 The average balance of certificates of deposit increased $36.6 million or
13.1% to $315.6 million, compared to $279.0 million the prior year. The average
cost of interest-bearing certificates of deposit increased 98 basis points to
3.95%, compared to 2.97% the prior year. Management was challenged during 2006
to balance the rate of attrition for all deposit categories while mitigating
increases in the cost of funds.
43
Interest expense on Federal Home Loan Bank of New York (FHLBNY)
advances increased $300 thousand or 203.1% to $500 thousand during 2006 compared
to $200 thousand in the prior year. The average balance of advances increased
$6.9 million to $10.5 million, compared to $3.7 million in 2005. The average
cost of borrowings increased 27 basis points to 4.57% compared to 4.30% in the
prior year. In September of 2005 the Company borrowed $10.0 million from the
FHLBNY in the form of a five year advance at a rate of 4.49%. During both years,
management utilized overnight and short-term lines of credit with the FHLBNY to
meet liquidity needs. There were no outstanding borrowings under the line of
credit at year end for either 2006 or 2005.
Provision for Loan Losses. We charge provisions for loan losses to
operations at a level required to reflect credit losses in the loan portfolio
that are both probable and reasonable to estimate. Management, in determining
the allowance for loan losses, considers the losses inherent in the loan
portfolio and changes in the nature and volume of our loan activities, along
with the general economic and real estate market conditions. We utilize a
three-tier approach: (1) identification of impaired loans and establishment of
specific allowances on such loans; (2) establishment of general valuation
allowances in the remainder of our loan portfolio, and (3) we establish a
specific loan loss allowance for an impaired loan based on delinquency status,
size of loan, type of collateral and/or appraisal of the underlying collateral
and financial condition of the borrower. Management bases general loan loss
allowances on a combination of factors including, but not limited to, actual
loan loss experience, composition of loan portfolio, current economic conditions
and management's judgment. The overall growth in the loan portfolio,
particularly in commercial loans, is expected to result in higher provisions
going forward.
The provision for loan loses increased $163 thousand to $291 thousand
for the year ended December 31, 2006 compared to $128 thousand for the prior
year. During 2006 total loans increased $42.6 million to $430.1 million at
December 31, 2006, compared to $387.5 million the prior year. The allowance for
loan losses was 0.27% of total loans at December 31, 2006, compared to 0.23% at
December 31, 2005.
Management assesses the allowance for loan losses monthly. While
management uses available information to recognize losses on loans, additional
loan loss provisions in the future may be necessary based on changes in economic
conditions. In addition, regulatory agencies as an integral part of their
periodic examinations review the allowance for loan losses and may require us to
record additional provisions based on their judgment of information available to
them at the time of their examination.
Non-Interest Income. Non-interest income includes fees and service
charges generated from loans and deposits, commissions on the sale of title
insurance policies, bank-owned-life-insurance income, and other miscellaneous
income. Non-interest income increased $600 thousand or 18.7% to $3.5 million in
2006 compared to $2.9 million in the prior year.
Commissions on sales of title insurance policies increased $200
thousand to $1.4 million in 2006. The Bank acquired General Abstract & Title
Agency in March 2005.
Fees and service charges on deposits increased $300 thousand or 81.2%
to $700 thousand in 2006. In August of 2006 the Bank implemented an overdraft
protection program. This program was principally responsible for the increase.
Fees and service charges on loans increased minimally from year to
year, primarily related to an overall increase in our loan portfolio.
44
Other non-interest income increased $37 thousand to $1.32 million this
year compared to $1.29 million in 2005.
Non-Interest Expense. Non-interest expense increased $6.1 million or
40.3 % to $21.2 million in 2006 compared to $15.1 million in 2005. Included in
non-interest expense is a $3.4 million contribution to the Foundation as part of
our initial public offering. The increase from year-to-year in non-interest
expense, excluding this one-time contribution, was $2.6 million or 17.4%
compared to the prior year.
Salaries and employee benefits increased $1.7 million or 19.6% to $10.3
million for the year ended December 31, 2006 compared to $8.6 million in 2005.
The increase in salaries and employee benefits was primarily due to the
following: (1) the opening of our corporate headquarters and new main office in
September 2005, with 2006 reflecting a full year of expense for this facility;
(2) the opening of a new branch in January of 2007; (3) a full year of General
Abstract salaries in 2006 compared to nine months in 2005; and (4) the
implementation of the Roma Bank Employee Stock Ownership Plan in connection with
our initial public offering in July of 2006.
Net occupancy expense increased $500 thousand or 43.5% to $1.7 million
for 2006 compared to $1.2 million in 2005. The increase in this category is
primarily due to the full year of operation in our corporate headquarters and
new main office, which opened in September 2005.
Equipment costs increased $300 thousand to $1.5 million for the year
ended December 31, 2006 compared to $1.2 million for the year ended December 31,
2005. The increase in this category is also primarily associated with the full
year of operations in the corporate headquarters and new office in 2006.
Data processing costs, advertising and Federal Insurance Premium
expense in the aggregate decreased $53,000 between years, or 2.3%. This minimal
decrease was primarily due to decreased telecommunication and monthly service
charges from our core processor.
Other non-interest expense increased $400 thousand, or 22%, to $2.1
million for 2006. Insurance expense increased $62 thousand and fees related to
the audit and Sarbanes-Oxley Section 404 compliance increased $140 thousand.
These increases are related to our becoming a public company during 2006.
Provision for Income Taxes. The provision for income taxes decreased
$1.4 million to $2.4 million for the year ended December 31, 2006, compared to
$3.8 million in the prior year. The decrease in income tax expense resulted from
the impact on net income of the contribution to the Foundation.
Comparison of Operating Results for the Years Ended December 31, 2005 and 2004
General. Net income for 2005 was $7.5 million, $77 thousand lower than
in 2004. A $3.4 million increase in interest income was negated by a $3.5
million increase in interest expense. A significant $1.3 million increase in
non-interest income from $1.6 million in 2004 to $2.9 million in 2005 was more
than offset by a $1.7 million increase in non-interest expense and an $80
thousand increase in the provision for loan losses.
45
Interest Income. Benefiting from a year-to-year growth in earning
assets of $77.8 million and a slight improvement in rates, interest income was
nearly 11.3% higher in 2005 compared to 2004; sharply improving on the minor
decrease between 2003 and 2004. With the exception of a 4% decline in
residential mortgage interest, interest income for all other major loan and
investment categories increased between years.
Interest on loans increased to $20.7 million from $18.7 million. The
average balance of loans increased 9.9% to $349.8 million in 2005 as compared to
$318.2 million in 2004 while the average yield on loans increased to 5.91% in
2005 from 5.89% in 2004. The average balance of taxable investment securities
increased 10.8% to $172.6 million in 2005 as compared to $155.8 million in 2004
while the average yield on taxable investment securities rose by 23 basis points
to 3.27% from 3.04%. The average balance of tax-exempt investment securities
decreased 4.4% to $10.8 million in 2005 as compared to $11.3 million in 2004
while that average yield on tax-exempt investment securities went from 4.57% to
4.53%. The average balance of mortgage-backed-securities increased 9.0% to
$150.6 million in 2005 as compared to $138.2 million in 2004 while the average
yield on mortgage-backed securities fell 15 basis points to 4.75% from 4.90%.
The overall yield on interest-earning assets improved to 4.90% in 2005 from
4.79% in 2004.
Interest Expense. Interest expense increased $3.5 million, or 47.3%, to
$10.9 million for 2005. The increase was fueled by (i) thirteen rate increases
initiated by the Federal Reserve during the second half of 2004 and through
2005, which aggregated 325 basis points; (ii) fierce competition for funds; and
(iii) substantial growth in certificates of deposit.
The upward movement in short term rates, the need to respond
competitively to the extraordinarily high rates offered by competitors, and the
need to stimulate deposit growth Florence Township and upon the opening of the
Washington Township branch, all combined to increase the average cost of
interest-bearing liabilities in 2005 by 46 basis points to 1.81% from 1.35%
A shift in the deposit base more heavily towards certificates, which
grew 31.7%, had a considerable influence on the cost of funds. Helping mitigate
this to some extent was success in attracting commercial accounts. Commercial
lending has generated growth in the Bank's non-interest bearing checking
accounts. The Bank's utilization of a five year fixed-rate FHLBNY advance in the
fourth quarter of 2005 had the effect of increasing the average cost of
liabilities.
Provision for Loan Losses. We charge provisions for loan losses to
operations at a level required to reflect credit losses in the loan portfolio
that are both probable and reasonable to estimate. Management, in determining
the allowance for loan losses, considers the losses inherent in the loan
portfolio and changes in the nature and volume of our loan activities, along
with the general economic and real estate market conditions. We utilize a
three-tier approach: (1) identification of impaired loans and establishment of
specific allowances on such loans; (2) establishment of general valuation
allowances in the remainder of our loan portfolio, and (3) we establish a
specific loan loss allowance for an impaired loan based on delinquency status,
size of loan, type of collateral and/ or appraisal of the underlying collateral
and financial condition of the borrower. Management bases general loan loss
allowances on a combination of factors including, but not limited to, actual
loan loss experience, composition of loan portfolio, current economic conditions
and management's judgment. Compared to 2004, the provision for 2005 increased
nearly $80 thousand to $128 thousand. The allowance for loan losses was 0.23% of
total loans at December 31, 2005, compared to 0.22% at December 31, 2004.
46
Non-Interest Income. Non-interest income includes fees and service
charges generated from loans and deposits, commissions on the sale of title
insurance policies, bank-owned-life-insurance income, and other miscellaneous
income. Overall, non-interest income increased by $1.3 million, or 85.6%, over
the prior year, of which $1.2 million was generated by General Abstract & Title
Agency. The Bank acquired General Abstract & Title Agency in March 2005.
Excluding General Abstract, the Bank's non-interest income improved $186
thousand for 2005.
Non-interest Expenses. Total non-interest expenses for 2005 were $15.1
million as compared to $13.4 million for 2004. Changes within the components of
non-interest expenses were as follows.
Salaries and employee benefits totaled $8.6 million for 2005, compared
to $7.8 million in the prior year, an increase of $800 thousand, or 10.1%. Of
this increase $566 thousand was attributable to salaries and benefits for
General Abstract, which was acquired in March of 2005.
Net occupancy expense increased $300 thousand to $1.2 million in 2005
compared to $800 thousand in 2004. The primary reasons for the increase was the
opening of our corporate headquarters and eighth branch in September of 2005 and
occupancy cost for General Abstract of $103 thousand.
Equipment expense increased $200 thousand to $1.2 million in 2005
compared to $1.0 million in 2004. The primary reason for the increase was not
capitalized costs for our corporate headquarters and eighth branch in 2005.
Data processing fees increased $36 thousand from 2004 to 2005. The
primary reason for the increase was charges related to higher transactional
activity with our VISA and ATM cards and vendor increases for those services,
which in the aggregate totaled $40 thousand.
Advertising expense increased $266 thousand in 2005 to $800 thousand
compared to $500 thousand in 2004. The Bank increased its overall advertising
initiatives to coincide with the new corporate office and branch opening and to
expand awareness of our commercial lending capabilities.
Other non-interest expenses increased $83 thousand from year to year.
Costs related to the acquisition of General Abstract were primarily responsible
for this increase.
Income Taxes. Income tax expense for 2005 was $3.9 million as compared
to $4.3 million for 2004. The reduction reflects lower income for 2005.
In the fourth quarter 2004, Roma Capital Investment Corporation was
incorporated as a wholly-owned subsidiary of the Bank. It was capitalized with
approximately $201.2 million in investments and mortgage-backed-securities
transferred from the Bank. In New Jersey, investment companies are taxed at a
rate of 3.6% rather than the business corporate rate of 9%. The presence of the
investment company during the year ended December 31, 2005 resulted in income
tax savings of approximately $281 thousand and reduced the consolidated
effective income tax rate by 2.5% and 0.6%, respectively.
47
Average Balance Sheet. The average yields and costs shown in the
following table are derived by dividing income or expense by the daily average
balance of assets or liabilities, respectively, for the periods presented.
At December 31, For the Year Ended December 31,
----------------- ---------------------------------------------------------------------------------------
2006 2006 2005 2004
----------------- ------------------------------- -------------------------- -------------------------
Actual Average Average Average
Actual Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ---- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable,
net (1) $420,382 6.24% $400,486 $24,748 6.18% $349,758 $20,662 5.91% $318,154 $18,740 5.89%
Mortgage-backed
securities held
to maturity 144,480 4.88 147,727 7,166 4.85 150,586 7,158 4.75 138,175 6,613 4.79
Investment
securities: (2)
Tax-exempt 11,750 4.41 11,450 503 4.39 10,829 490 4.53 11,329 518 4.57
Taxable 177,508 4.06 181,038 6,468 3.57 172,610 5,638 3.27 155,824 4,900 3.14
Other interest-
earning assets (3) 58,914 5.10 41,932 1,984 4.73 22,646 684 3.02 26,727 377 1.41
-------- -------- ------- ------ ------- -------- -------
Total interest-
earning
assets 813,034 5.41 782,633 40,869 5.22 706,429 34,632 4.90 650,209 31,148 4.79
------- ------ ------
Non-interest-earning
assets 63,047 59,532 50,749 39,906
-------- -------- ------ --------
Total assets $876,081 $842,165 $757,178 $690,115
======== ======== ======== ========
Interest-bearing
liabilities:
Interest-bearing
demand $ 98,278 0.53 $ 94,204 $ 512 0.54 $100,241 $ 477 0.48 $ 95,251 $356 0.37
Savings and club 185,925 0.93 208,364 1,717 0.82 219,368 1,987 0.91 227,110 1,675 0.74
Certificates of
deposit 316,660 4.30 315,613 12,479 3.95 279,026 8,278 2.97 224,750 5,361 2.39
Federal Home
Loan Bank
borrowings 7,863 4.49 10,548 482 4.57 3,694 159 4.30 7 - 1.43
-------- -------- ------- ----- ------- -------- -------
Total interest-
bearing
liabilities 608,726 2.66 628,729 15,190 2.42 602,329 10,901 1.81 547,118 7,392 1.35
------- ------- -------
Non-interest-bearing
liabilities 32,701 32,140 19,327 16,512
-------- -------- ------ --------
Total liabilities 641,427 660,869 621,656 563,630
Stockholders' equity 234,654 181,296 135,522 126,485
-------- -------- ------- --------
Total liabilities
and stockholders'
equity $876,081 $842,165 $757,178 $690,115
======== ======== ======== ========
Net interest income $25,679 $23,731 $23,756
======= ======= =======
Interest rate
spread (4) 2.75% 2.80% 3.09% 3.44%
==== ==== ==== ====
Net yield on
interest-earning
assets (5) 3.28% 3.36% 3.65%
==== ==== ====
Ratio of
average interest
-earning assets
to average
interest-bearing
liabilities 1.24x 1.17x 1.19x
==== ==== ====
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes both available for sale and held to maturity securities.
(3) Includes interest-bearing deposits at other banks, federal funds purchased
and Federal Home Loan Bank of New York capital stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
48
Rate/Volume Analysis.
The following table reflects the sensitivity of our interest income and
interest expense to changes in volume and in prevailing interest rates during
the periods indicated. Each category reflects the: (1) changes in volume
(changes in volume multiplied by old rate); (2) changes in rate (changes in rate
multiplied by old volume): and (3) net change. The net change attributable to
the combined impact of volume and rate has been allocated proportionally to the
absolute dollar amounts of change in each.
Year Ended December 31, Year Ended December 31,
2006 vs. 2005 2005 vs. 2004
Increase (Decrease) Due To Increase (Decrease) Due To
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In thousands)
Interest and dividend income:
Loans receivable $ 3,145 $ 941 $ 4,086 $ 1,858 $ 64 $ 1,922
Mortgage-backed securities,
held to maturity (147) 155 8 590 (45) 545
Investment securities:
Tax-exempt 28 (15) 13 (23) (5) (28)
Taxable 294 536 830 543 195 738
Other interest earnings assets 913 387 1,300 (58) 365 307
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 4,233 $ 2,004 $ 6,237 $ 2,910 $ 574 $ 3,484
======= ======= ======= ======= ======= =======
Interest expense:
Interest-bearing demand $ (28) $ 63 $ 35 $ 17 $ 104 $ 121
Savings and club (100) (170) (270) (57) 369 312
Certificates of deposit 1,094 3,107 4,201 1,294 1,623 2,917
Advances from Federal Home Loan Bank 313 10 323 158 101 159
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 1,279 $ 3,010 $ 4,289 $ 1,412 $ 2,207 $ 3,509
======= ======= ======= ======= ======= =======
Change in net interest income $ 2,954 $(1,006) $ 1,948 $ 1,498 $(1,523) $ (25)
======= ======= ======= ======= ======= =======
49
Liquidity, Commitments and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, amortization, prepayments and maturities of
mortgage-backed securities and outstanding loans, maturities of investment
securities and funds provided from operations. In addition, the Bank invests
excess funds in short-term interest-earnings assets such as overnight deposits
or U.S. agency securities, which provide liquidity to meet lending requirements.
While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, general interest rates, economic
conditions and competition greatly influence deposit flows and prepayments on
loans and mortgage-backed securities.
The Bank is required to have enough investments that qualify as liquid
assets in order to maintain sufficient liquidity to ensure a safe operation.
Liquidity may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans. The Bank
attempts to maintain adequate but not excessive liquidity, and liquidity
management is both a daily and long-term function of business management.
The Bank reviews cash flow projections regularly and updates them in
order to maintain liquid assets at levels believed to meet the requirements of
normal operations, including loan commitments and potential deposit outflows
from maturing certificates of deposit and savings withdrawals. At December 31,
2006 the Bank had outstanding commitments to originate loans of $5.6 million,
and unused lines of credit of $44.1 million. Certificates of deposit scheduled
to mature in one year or less at December 31, 2006 totaled $237.8 million.
While deposits are the Bank's primary source of funds, the Bank also
generates cash through borrowings from the Federal Home Loan Bank of New York
(the "FHLBNY"). The Bank has traditionally enjoyed cash flows from deposit
activities that were sufficient to meet its day-to-day funding obligations and
only occasionally used its overnight line of credit or borrowing facility with
the FHLBNY. At various times during 2006 and 2005, the Bank used its overnight
line of credit at the FHLBNY to meet daily operations. In the third quarter of
2005 the Bank took a five year advance from the FHLBNY to meet the strong demand
for loans. At December 31, 2006 the Bank's borrowing limit with the FHLBNY was
$153.3 million.
The following table discloses our contractual obligations and
commitments as of December 31, 2006.
50
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 years
----- ------ --------- --------- -------
(In thousands)
Federal Home Loan Bank
borrowings $ 7,862 $ 1,923 $ 4,098 $ 1,842 $ -
======= ======= ======= ======= ======
Total
Amounts Less Than After
Committed 1 Year 1-3 Years 4-5 Years 5 years
--------- ------ --------- --------- -------
(In thousands)
Lines of credit (1) $ 44,053 $ 44,053 $ - $ - $ -
Construction loans in process 8,353 8,353 - - -
Other commitments to
extend credit 5,587 5,587 - - -
-------- -------- ------- ------- ------
Total $ 57,993 $ 57,993 $ - $ - $ -
======== ======== ======= ======= ======
(1) Represents amounts committed to customers
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain its status as a
well-capitalized institution in accordance with regulatory standards. As of
December 31, 2006, the Bank exceeded all capital requirements of the Office of
Thrift Supervision (The "OTS").
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in
the normal course of our business of investing in loans and securities as well
as in the normal course of maintaining and improving the Bank's facilities.
These financial instruments include significant purchase commitments, such as
commitments related to capital expenditure plans and commitments to purchase
investment securities or mortgage backed securities, and commitments to extend
credit to meet the financial needs of our customers. At December 31, 2006, we
had no significant off-balance sheet commitments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Our exposure to credit loss in the event of
non-performance by other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance-sheet instruments. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. For
additional information regarding our outstanding lending commitments at December
31, 2006, see Note 13 to the consolidated financial statements contained in this
Annual Report on Form 10-K.
Impact of Inflation
The financial statements included in this document have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
51
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities of our assets and
liabilities are critical.
The principal effect of inflation on earnings, as distinct from levels
of interest rates, is in the area of non-interest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
companies recognize in their financial statements the impact of a tax position,
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact of adopting FIN 48 on our
financial statements.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets -- An Amendment of FASB Statement No. 140" ("SFAS 156").
SFAS 156 requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. The statement
permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. SFAS 156 is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006,
which for the Company will be as of the beginning of fiscal 2007. The Company
does not believe that the adoption of SFAS 156 will have a significant effect on
its financial statements.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently evaluating the
potential impact, if any, of the adoption of FASB Statement No. 157 on our
consolidated financial position, results of operations and cash flows.
In September of 2006, the SFAS issued FASB 158, "Employers' Accounting
for Defined Benefit Pension and other Postretirement Plans" which required that
an employer that sponsors one more single-employer defined benefit plans to
recognize the funded status of a benefit plan, measured as the difference
between plan assets at fair value and the benefit obligation in the statement of
financial position The statement also required the recognition as a component of
other comprehensive income, net of tax, the gains or losses and prior service
costs or credits as they arise. The statement is effective for fiscal years
ending after December 15, 2006. Accordingly, FASB 158 adjustments are reflected
in these financial statements.
52
In February of 2007, the SFAS issued FASB No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities-Including an amendment of
FASB Statement No. 115." SFAS no. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for our Company on January 1, 2008. The Company is evaluating the
impact that the adoption of SFAS no. 159 will have on our consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our assets and
liabilities are sensitive to changes in interest rates, a significant form of
market risk for us is interest rate risk, or changes in interest rates.
We derive our income mainly from the difference or "spread" between the
interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities. In
general, the larger the spread, the more we earn. When market rates of interest
change, the interest we receive on our assets and the interest we pay on our
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income.
The rates that we earn on our assets are generally fixed for a
contractual period of time. We, like many savings institutions, have liabilities
that have generally shorter contractual maturities than our assets, such as
certificates of deposit, or have no stated maturity, such as savings and money
market deposits. This imbalance can create significant volatility because market
interest rates change over time. In a period of rising interest rates, the
interest income earned on our assets, which consist primarily of long-term fixed
rate securities, may not increase as rapidly as the interest paid on our
liabilities.
While the federal funds rate and other short-term market interest
rates, which we use as a guide to our deposit pricing, have increased,
intermediate-and long-term market interest rates, which we use as a guide to our
loan pricing, have not increased proportionately. This has led to a "flattening:
of the market yield curve, which has even "inverted" as short-term rates have
exceeded long-term rates over an intermediate maturity horizon. The flat yield
curve has hurt our interest rate spread and net interest margin because the
interest rates we pay on our deposits have repriced upwards faster than the
interest rates that we earn on our loans and investments. If short-term interest
rates continue to rise so that the yield curve remains relatively flat or
inverts further, we would expect that our new interest spread and net interest
margin would continue to compress, which would hurt our net interest income.
A failing rate environment would result in a decrease in rates we pay
on deposits and borrowings, but the decrease in the cost of our funds may not be
as great at the decrease in the yields on our loan portfolio and mortgage-backed
securities and loan portfolios. This could cause a narrowing of our net interest
rate spread and could cause a decrease in our earnings.
Quantitative Analysis. The following table presents the Bank's net
portfolio value as of December 31, 2006. The net portfolio values shown in this
table were calculated by the Office of Thrift Supervision, based on information
provided by the Bank.
53
December 31, 2006
Net Portfolio Value
as % of Present Value of Assets
Changes in Net Portfolio Value Net Portfolio Basis Point
Rates (1) $ Amount $ Change % Change Value Ratio Change
-------- -------- -------- ----------- ------
+300 bp 170,998 -46,891 (22)% 21.09% (406) bp
+200 bp 186,955 -30,934 (12)% 22.54% (262) bp
+100 bp 202,521 -15,368 (6)% 23.88% (127) bp
0 bp 217,889 - - 25.15% -
-100 bp 2228,407 10,518 5% 25.96% 81 bp
(1) The -200bp and -300bp scenarios are not shown due to the low prevailing
interest rate environment.
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. Although certain assets and
liabilities may have similar maturity or periods of repricing, they may react in
different times and in different degrees to changes in the marker interest
rates. The interest rate on certain types of assets and liabilities, such as
demand deposits and savings accounts, may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. Certain assets, such as adjustable
rate mortgages, generally have features which restrict changes in interest rates
on a short-term basis and over the life of the asset. In the event of a change
in interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Notwithstanding the discussion above, the quantitative interest rate
analysis presented above indicates that a rapid increase in interest rates would
adversely affect our net interest margin and earnings.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The Company's financial statements and supplementary data are contained
in this Annual Report on Form 10-K immediately following Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
Item 9A. Controls and Procedures
---------------------------------
(a) Disclosure Controls and Procedures
An evaluation was performed under the supervision, and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule l3a-l5(e)
promulgated under the Securities Exchange Act of 1934, as amended) as of
December 31, 2006. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective as of December 31, 2006.
54
(b) Internal Control Over Financial Reporting
No change in the Company's internal controls over financial reporting
(as defined in Rule l3a-l5(f) promulgated under the Securities Exchange Act of
1934, as amended) occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item 9B. Other Information
---------------------------
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
----------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I -- Election of
Directors" and "-- Biographical Information" in the definitive Proxy Statement
for the 2007 Annual Meeting of Stockholders ("Proxy Statement") is incorporated
herein by reference.
Item 11. Executive Compensation
--------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof -- Security Ownership of Certain
Beneficial Owners" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof -- Security Ownership of Certain
Beneficial Owners" and "Proposal I -- Election of Directors" of
the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control
of the registrant.
(d) Securities Authorized for Issuance Under Equity Compensation
Plans
None.
55
Item 13. Certain Relationships and Related Transactions, and Director
--------------------------------------------------------------------------------
Independence
------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Certain Relationships and Related Transactions" of the Proxy Statement.
Item 14. Principal Accounting Fees and Services
------------------------------------------------
The information called for by this item is incorporated herein by
reference to the section entitled "Ratification of Appointment of Accountants"
in the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
----------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report, and are incorporated by reference.
1. The consolidated statements of financial condition of Roma
Financial Corporation and subsidiary as of December 31, 2006 and
2005, and the related consolidated statements of financial
condition, income, changes in stockholders' equity and cash flows
for each of the years in the three year period ended December 31,
2006, together with the related notes and the Independent
Registered Public Accounting Firms auditors' report of Beard
Miller Company LLP.
2. Schedules omitted as they are not applicable.
3. Exhibits
The following Exhibits are filed as part of this report:
3.1 Charter of Roma Financial Corporation *
3.2 Bylaws of Roma Financial Corporation*
4 Stock Certificate of Roma Financial Corporation*
10.1 Employment Agreement between Roma Bank and Maurice T. Perilli*
10.2 Form of Supplemental Executive Retirement Agreement*
10.3 Form of Phantom Stock Appreciation Rights Agreement*
21 Subsidiaries of the Registrant
23 Consent of Beard Miller Company LLP
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
---------------
* Incorporated by reference to the Registrant's Form S-1 Registration Statement No. 333-132415.
56
ROMA FINANCIAL CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Page
----
Independent Auditor's Report............................................. F-1
Consolidated Statements of Financial Condition........................... F-2
Consolidated Statements of Income........................................ F-3
Consolidated Statements of Changes in Stockholders' Equity............... F-4
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
57
[LOGO] BMC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Roma Financial Corporation
Robbinsville, New Jersey
We have audited the accompanying consolidated statements of financial
condition of Roma Financial Corporation and subsidiaries (the "Corporation") as
of December 31, 2006 and 2005, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing 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 the consolidated financial statements are free of material misstatement.
The Corporation is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Corporation's internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
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 consolidated financial position of
Roma Financial Corporation and subsidiaries as of December 31, 2006 and 2005,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the Company changed its method accounting for
Defined Benefit Pension and Other Postretirement Plans in 2006.
/s/Beard Miller Company LLP
Beard Miller Company LLP
Pine Brook, New Jersey
March 7, 2007
F-1
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
December 31,
----------------------
2006 2005
--------- ---------
(In thousands, except for share data)
Assets
Cash and amounts due from depository institutions $ 7,219 $ 5,745
Interest-bearing deposits in other banks 26,521 22,324
Money market funds 30,961 20
--------- ---------
Cash and Cash Equivalents 64,701 28,089
Securities available for sale 19,331 15,514
Investment securities held to maturity 169,927 173,078
Mortgage-backed securities held to maturity 144,480 150,101
Loans receivable, net of allowance for loan losses $1,169 and $878,
respectively 420,382 378,708
Premises and equipment 30,669 28,679
Federal Home Loan Bank of New York stock 1,432 1,387
Interest receivable 4,598 3,798
Bank owned life insurance 16,185 15,640
Other assets 4,376 2,766
--------- ---------
Total Assets $ 876,081 $ 797,760
========= =========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing $ 25,109 $ 20,661
Interest-bearing 600,863 623,152
--------- ---------
Total deposits 625,972 643,813
Federal Home Loan Bank of New York advances 7,863 9,702
Advance payments by borrowers for taxes and insurance 2,275 2,063
Other liabilities 5,317 3,524
--------- ---------
Total Liabilities 641,427 659,102
--------- ---------
Commitments and Contingencies
Stockholders' Equity
Common stock, $.10 par value, 45,000,000 authorized; (2006) 32,731,875
issued and outstanding; (2005) 10,000 authorized, issued and outstanding 3,274 1
Paid-in capital 97,069 799
Retained earnings 143,068 137,820
Unearned shares held by Employee Stock Ownership Plan (7,847) -
Accumulated other comprehensive income - unrealized gain on securities
available for sale, net (910) 38
--------- ---------
Total Stockholders' Equity 234,654 138,658
--------- ---------
Total Liabilities and Stockholders' Equity $ 876,081 $ 797,760
========= =========
See notes to consolidated financial statements.
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F-2
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Income
Years Ended December 31,
---------------------------
2006 2005 2004
------- ------- -------
(In thousands, except for per share data)
INTEREST INCOME
Loans $24,748 $20,662 $18,740
Mortgage-backed securities held to maturity 7,166 7,158 6,613
Investment securities held to maturity 6,406 5,661 4,720
Securities available for sale 565 467 698
Other interest-earning assets 1,984 684 377
------- ------- -------
Total Interest Income 40,869 34,632 31,148
------- ------- -------
INTEREST EXPENSE
Deposits 14,708 10,742 7,392
Borrowings 482 159 -
------- ------- -------
Total Interest Expense 15,190 10,901 7,392
------- ------- -------
Net Interest Income 25,679 23,731 23,756
PROVISION FOR LOAN LOSSES 291 128 48
------- ------- -------
Net Interest Income after Provision for Loan Losses 25,388 23,603 23,708
------- ------- -------
NON-INTEREST INCOME
Commissions on sales of title policies 1,361 1,159 -
Fees and service charges on deposits and loans 771 458 403
Income from bank owned life insurance 695 666 661
Net gain from sale of mortgage loans originated for sale 6 14 36
Other 627 619 471
------- ------- -------
Total Non-Interest Income 3,460 2,916 1,571
------- ------- -------
NON-INTEREST EXPENSES
Salaries and employee benefits 10,282 8,595 7,804
Net occupancy expense of premises 1,653 1,152 820
Equipment 1,483 1,241 1,028
Data processing fees 1,273 1,324 1,288
Advertising 806 813 547
Federal insurance premium 86 81 81
Charitable contributions 3,527 231 188
Other 2,096 1,695 1,655
------- ------- -------
Total Non-Interest Expenses 21,206 15,132 13,411
------- ------- -------
Income before Income Taxes 7,642 11,387 11,868
INCOME TAXES 2,394 3,852 4,256
------- ------- -------
Net Income $ 5,248 $ 7,535 $ 7,612
======= ======= =======
NET INCOME PER COMMON SHARE
Basic $ .19 $ .33 $ .33
======= ======= =======
Diluted $ .19 $ .33 $ .33
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 27,305 22,584 22,584
======= ======= =======
Diluted 27,305 22,584 22,854
======= ======= =======
See notes to consolidated financial statements.
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F-3
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2006, 2005 and 2004
Retained Accumulated
Earnings - Unearned Other
Common Paid-In Substantially Shares Held Comprehensive
Stock Capital Restricted by ESOP Income Total
----- ------- ---------- ------- ------ -----
(In Thousands)
Balance - December 31, 2003 $ - $ - $123,673 - $145 $123,818
--------
Comprehensive income:
Net income - - 7,612 - - 7,612
Unrealized holding loss on securities
available for sale, net of income taxes
of $(27) - - - - (37) (37)
--------
Total Comprehensive Income 7,575
----- ----- -------- ----- ---- --------
Balance - December 31, 2004 - - 131,285 - 108 131,393
--------
Comprehensive income:
Net income - - 7,535 - - 7,535
Unrealized holding loss on securities
available for sale, net of income taxes
of $(49) - - - - (70) (70)
--------
Total Comprehensive Income 7,465
--------
Initial capitalization of mutual holding
company 1 799 (1,000) - - (200)
----- ----- -------- ----- ---- --------
Balance - December 31, 2005 1 799 137,820 - 38 138,658
--------
See notes to consolidated financial statements.
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F-4
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2006, 2005 and 2004
Retained Accumulated
Earnings - Unearned Other
Common Paid-In Substantially Shares Held Comprehensive
Stock Capital Restricted by ESOP Income Total
----- ------- ---------- ------- ------ -----
(In Thousands)
Comprehensive income:
Net income - - 5,248 - - 5,248
Unrealized holding loss on securities
available for sale, net of income taxes
of $(72) - - - -
(158) (158)
Initial application of FASB 158,
net of income taxes $(526) - - - - (790) (790)
-------
Total Comprehensive Income - - - - - 4,300
-------
Issuance of common stock, net of
expenses 3,273 96,126 - - - 99,399
ESOP shares earned - 144 - 270 - 414
Common stock acquired by ESOP - - - (8,117) - (8,117)
------ ------- -------- ------- ----- --------
Balance - December 31, 2006 $3,274 $97,069 $143,068 $(7,847) $(910) $234,654
====== ======= ======== ======= ===== ========
See notes to consolidated financial statements.
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F-5
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Years Ended December 31,
--------------------------------
2006 2005 2004
-------- -------- --------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,248 $ 7,535 $ 7,613
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of premises and equipment 1,178 755 566
Amortization of premiums and accretion of discounts on securities (44) (91) (99)
Accretion of deferred loan fees and discounts 34 (171) (177)
Net gain on sale of mortgage loans originated for sale (6) (14) (36)
Mortgage loans originated for sale (823) (2,718) (4,858)
Proceeds from sales of mortgage loans originated for sale 829 2,732 4,894
Provision for loan losses 291 128 48
Deferred income tax expense (benefit) (1,835) 134 (175)
Contribution of common stock to charitable foundation 3,273 - -
(Increase) in interest receivable (800) (611) (230)
(Increase) in cash surrender value of bank owned life insurance (545) (526) (533)
(Increase) decrease in other assets (310) (1,020) 295
Increase (decrease) in interest payable 397 716 (11)
Increase (decrease) in other liabilities 1,239 145 808
Allocation of ESOP shares 414 - -
-------- -------- --------
Net Cash Provided by Operating Activities 8,540 6,994 8,105
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from calls and repayments on securities available for sale 1,264 17 148
Proceeds from maturities and calls of securities available for sale - - 2,395
Purchases of securities available for sale (5,338) (2,101) (2,095)
Proceeds from maturities and calls of investment securities held to
maturity 49,000 10,060 41,160
Purchases of investment securities held to maturity (45,845) (22,988) (48,449)
Principal repayments on mortgage-backed securities held to maturity 25,453 31,207 32,923
Purchases of mortgage-backed securities held to maturity (19,791) (42,936) (35,893)
Net increase in loans receivable (41,999) (43,415) (31,289)
Additions to premises and equipment (3,168) (8,879) (7,089)
(Purchase) redemption of Federal Home Loan Bank of New York stock (45) 2,652 (105)
Purchase of bank owned life insurance - - (1)
-------- -------- --------
Net Cash Used in Investing Activities (40,469) (76,383) (48,295)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (17,841) 67,513 31,839
Increase in advance payments by borrowers for taxes and insurance 212 519 77
Federal Home Loan Bank of New York advances - 10,000 -
Repayments of Federal Home Loan Bank of New York advances (1,839) (298) -
Initial capitalization of mutual holding company - (200) -
Common stock acquired by ESOP (8,117) - -
Net proceeds from issuance of common stock 96,126 - -
-------- -------- --------
Net Cash Provided by Financing Activities 68,541 77,534 31,916
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 36,612 8,145 (8,274)
CASH AND CASH EQUIVALENTS - BEGINNING 28,089 19,944 28,218
-------- -------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 64,701 $ 28,089 $ 19,944
======== ======== ========
SUPPLEMENTARY CASH FLOWS INFORMATION
Income taxes paid, net $ 2,948 $ 4,271 $ 4,470
======== ======== ========
Interest paid $ 14,786 $ 10,185 $ 7,403
======== ======== ========
See notes to consolidated financial statements.
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F-6
Roma Financial Corporation and Subsidiaries
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Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Roma
Financial Corporation (the "Company"), its wholly-owned subsidiary, Roma
Bank (the "Bank") and the Bank's wholly-owned subsidiaries, Roma Capital
Investment Co. (the "Investment Co.") and General Abstract and Title Agency
(the "Title Co."). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The Investment Co. was incorporated in the State of New Jersey effective
September 4, 2004, and began operations October 1, 2004. The Investment Co.
is a special purpose entity whose activities are limited to holding
investment securities and collection of earnings, principal repayments and
recognizing other gains/losses thereon. It holds a substantial portion of
the Company's investment and mortgage-backed securities portfolios and is
subject to the investment company provisions of the New Jersey Corporation
Business Tax Act. The Title Co. was incorporated in the State of New Jersey
effective March 7, 2005 and commenced operations April 1, 2005 upon the
acquisition of the assets of the General Abstract & Title Agency (the
"Agency"), which consisted primarily of the Agency's title search files.
Related goodwill of approximately $572,000 was recognized as a result of
the purchase price exceeding the fair market value of assets acquired.
Basis of Consolidated Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated statements of
financial condition and revenues and expenses for the periods then ended.
Actual results could differ significantly from those estimates.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management
uses the most current information available to recognize losses on loans,
future additions to the allowance for loan losses may be necessary based on
changes in economic conditions in the market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at
the time of their examinations.
Business of the Company and Subsidiaries
The Company's primary business is the ownership and operation of the Bank.
The Bank is principally engaged in the business of attracting deposits from
the general public at its nine locations in New Jersey and using those
deposits, together with other funds, to invest in securities and to make
loans collateralized by residential and commercial real estate and, to a
lesser extent, consumer loans. The Bank's subsidiary, Roma Capital
Investment Company, was organized to hold investments and mortgage-backed
securities. The Bank's subsidiary, General Abstract and Title Agency,
provides title searches and policies its customers real estate investments.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits in other banks with original
maturities of three months or less and money market funds.
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F-7
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Securities
Investments in debt securities that the Bank and the Investment Co. have
the positive intent and ability to hold to maturity are classified as held
to maturity securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading securities and reported at
fair value, with unrealized holding gains and losses included in earnings.
Debt and equity securities not classified as trading securities nor as held
to maturity securities are classified as available for sale securities and
reported at fair value, with unrealized holding gains or losses, net of
deferred income taxes, reported in the accumulated other comprehensive
income component of stockholders' equity.
Declines in the fair value of available for sale and held to maturity
securities below their amortized cost that are deemed to be other than
temporary are reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers (1) the length
of time and the extent to which the fair value has been less than amortized
cost, (2) the financial condition and near-term prospects of the issuer,
and (3) the intent and ability of the Bank and Investment Co. to retain the
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
Discounts and premiums are accreted/amortized to income by use of the
level-yield method.
Gain or loss on sales of securities is based on the specific identification
method.
Loans Receivable
Loans receivable are carried at unpaid principal balances, less the
allowance for loan losses and net deferred loan fees and discounts.
The Bank defers loan origination fees and certain direct loan origination
costs and accretes/amortizes such amounts to income using the level-yield
method over the contractual lives of the related loans.
The Bank provides an allowance for the loss of uncollected interest on
loans that are more than ninety days delinquent as to principal or
interest. Such interest ultimately collected is credited to income in the
period of recovery.
Allowance for Loan Losses
An allowance for loan losses is maintained at a level that represents
management's best estimate of losses known and inherent in the loan
portfolio that are both probable and reasonable to estimate. Management of
the Bank, in determining the allowance for loan losses, considers the
credit risks inherent in its loan portfolio and changes in the nature and
volume of its loan activities, along with the general economic and real
estate market conditions. The Bank utilizes a three tier approach which
identifies: (1) impaired loans for which specific reserves are established;
(2) classified loans for which a higher yield allowance is established;
and, (3) performing loans for which a general valuation allowance is
established.. The Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of
potential impaired loans. Such system takes into consideration, among other
things, delinquency status, size of loans, types of collateral and
financial condition of the borrowers. Specific loan loss allowances are
established for identified loans based on a review of such information
and/or appraisals of the underlying collateral. General loan loss
allowances are based upon a combination of factors including, but not
limited to, actual loan loss experience, composition of the loan portfolio,
current economic conditions and management's judgment. Although management
believes that appropriate loan loss allowances are established, actual
losses are dependent upon future events and, as such, further additions to
the level of loan loss allowances may be
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F-8
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
necessary. Payments received on impaired loans are applied first to accrued
interest receivable and then to principal.
A loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. All loans identified as impaired are evaluated independently.
The Bank does not aggregate such loans for evaluation purposes. Payments
received on impaired loans are applied first to interest receivable and
then to principal.
Premises and Equipment
Premises and equipment are comprised of land, including land held for
future development, and land improvements, at cost, and buildings and
improvements and furnishings and equipment, at cost, less accumulated
depreciation. Depreciation charges are computed on the straight-line method
over the following estimated useful lives:
Years
------------
Buildings and improvements 20 - 50
Furnishings and equipment 3 - 10
Construction in progress primarily represents facilities under construction
for future use in our business and includes all costs to acquire land and
construct buildings, as well as capitalized interest during the
construction period. Interest is capitalized at the average interest rate
of overnight funds.
Significant renewals and betterments are charged to the premises and
equipment account. Maintenance and repairs are charged to expense in the
year incurred. Rental income is netted against occupancy costs in the
consolidated statements of income.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank
system to hold restricted stock of its district Federal Home Loan Bank
according to a predetermined formula. The restricted stock is carried at
cost.
Bank Owned Life Insurance
The Bank is the beneficiary of insurance policies on the lives of certain
officers, employees and directors of the Bank. This life insurance
investment is accounted for using the cash surrender value method and is
recorded at its net realizable value. The change in the net asset value is
recorded as non-interest income.
Income Taxes
The Company and it subsidiaries file a consolidated federal income tax
return. Income taxes are allocated to the Company and its subsidiaries
based on the contribution of their income or use of their loss in the
consolidated return. Separate state income tax returns are filed by the
Company and its subsidiaries.
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F-9
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Income Taxes (Continued)
Federal and state income taxes have been provided on the basis of reported
income. The amounts reflected on the tax returns differ from these
provisions due principally to temporary differences in the reporting of
certain items for financial reporting and income tax reporting purposes.
Deferred income taxes have been recorded to recognize such temporary
differences.
Advertising Costs
Advertising costs are expensed as incurred. The direct response advertising
conducted by the Bank is immaterial and has not been capitalized.
Other Comprehensive Income
The Company records unrealized gains and losses, net of deferred income
taxes, on available for sale securities in accumulated other comprehensive
income. Realized gains and losses, if any, are reclassified to non-interest
income upon the sale of the related securities or upon the recognition of
an impairment loss. The Company has elected to report the effects of other
comprehensive income in the consolidated statements of stockholders'
equity.
Other comprehensive income also includes amounts recognized in the
implementation of SFAS 158. This adjustment to other comprehensive income
reflects, net of tax, transition obligations, prior service costs, and
unrealized net losses that had not been recognized in the consolidated
financial statements prior to the implementation of SFAS 158.
Interest Rate Risk
We are principally engaged in the business of attracting deposits from the
general public and using these deposits, together with borrowings and other
funds, to purchase securities and to make loans secured by real estate. The
potential for interest-rate risk exists as a result of the generally
shorter duration of our interest-sensitive liabilities compared to the
generally longer duration of our interest-sensitive assets. In a rising
rate environment, liabilities will reprice faster than assets, thereby
reducing net interest income. For this reason, management regularly
monitors the maturity structure of our assets and liabilities in order to
measure our level of interest-rate risk and to plan for future volatility.
Concentration of Risk
The Bank's lending activity is chiefly concentrated in loans secured by
real estate located in the State of New Jersey. The Bank also had deposits
in excess of the FDIC insurance limit at other financial institutions. At
December 31, 2006 and 2005, such deposits totaled $57.4 million and $22.3
million, which were held by the Federal Home Loan Bank of New York and
another financial institution. Generally, deposits in excess of $100,000
are not insured by the FDIC.
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F-10
Roma Financial Corporation and Subsidiaries
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Notes to Consolidated Financial Statements
Note 1 - 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 us, (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) we do not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, we have entered into commitments to
extend credit, including commitments under lines of credit. Such financial
instruments are recorded when they are funded.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires
that companies recognize in their financial statements the impact of a tax
position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. The provisions of FIN
48 are effective for fiscal years beginning after December 15, 2006, with
the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently evaluating the
impact of adopting FIN 48 on our financial statements.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets -- An Amendment of FASB Statement No. 140" ("SFAS 156").
SFAS 156 requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable.
The statement permits, but does not require, the subsequent measurement of
servicing assets and servicing liabilities at fair value. SFAS 156 is
effective as of the beginning of an entity's first fiscal year that begins
after September 15, 2006, which for the Company will be as of the beginning
of fiscal 2007. The Company does not believe that the adoption of SFAS 156
will have a significant effect on its financial statements.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value under GAAP, and expands disclosures about fair value
measurements. FASB Statement No. 157 applies to other accounting
pronouncements that require or permit fair value measurements. The new
guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those
fiscal years. We are currently evaluating the potential impact, if any, of
the adoption of FASB Statement No. 157 on our consolidated financial
position, results of operations and cash flows.
In September of 2006, the SFAS issued FASB 158, "Employers' Accounting for
Defined Benefit Pension and other Postretirement Plans" which required that
an employer that sponsors one more single-employer defined benefit plans to
recognize the funded status of a benefit plan, measured as the difference
between plan assets at fair value and the benefit obligation in the
statement of financial position The statement also required the recognition
as a component of other comprehensive income, net of tax, the gains or
losses and prior service costs or credits as they arise. The statement is
effective for fiscal years ending after December 15, 2006. Accordingly,
FASB 158 adjustments are reflected in these financial statements.
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F-11
Roma Financial Corporation and Subsidiaries
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Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
In February of 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities-Including an amendment of
FASB Statement No. 115." SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has
been elected will be recognized in earnings at each subsequent reporting
date. SFAS No. 159 is effective for our Company on January 1, 2008. The
Company is evaluating the impact that the adoption of SFAS no. 159 will
have on our consolidated financial statements.
Earnings per Common Share ("EPS)
Basic earnings per share is based on the weighted average number of common
shares actually outstanding adjusted for Employee Stock Ownership Plan
("ESOP") shares not yet committed to be released. Diluted EPS is calculated
by adjusting the weighted average number of shares of common stock
outstanding to include the effect of contracts or securities exercisable or
which could be converted into common stock, if dilutive, using the treasury
stock method. During the periods presented, diluted EPS dud bit duffer from
basic EPS as there were no existing contracts or securities exercisable or
convertible into common stock during these periods. Shares issued and
reacquired during any period are weighted for the portion of the period
they were outstanding. The 10,000 shares issued to Roma Financial
Corporation, MHC in connection with the Company's reorganization in 2004
were "replaced" with 22,584,994 shares, or 69% of the shares issued in the
Company's initial public offering. This transaction is analogous to a stock
split or significant stock dividend, therefore, net income per common share
for those shares have been retroactively restated for all periods
presented.
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F-12
Roma Financial Corporation and Subsidiaries
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Notes to Consolidated Financial Statements
Note 2 - Securities Available for Sale
December 31, 2006
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Mortgage-backed securities $ 1,507 $ 17 $ - $ 1,524
------- ---- ---- -------
Obligations of state and political subdivisions:
After five years through ten years 4,148 66 - 4,214
After ten years 5,867 74 - 5,941
------- ---- ---- -------
10,015 140 - 10,155
------- ---- ---- -------
U.S. Government (including agencies) due after
one year through five years 2,000 - 21 1,979
Equity securities 3,630 39 222 3,447
Mutual fund shares 2,368 - 142 2,226
------- ---- ---- -------
$19,520 $196 $385 $19,331
======= ==== ==== =======
December 31, 2005
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Mortgage-backed securities $ 121 $ 9 $ - $ 130
------- ---- ---- -------
Obligations of state and political subdivisions:
After five years through ten years 2,098 44 - 2,142
After ten years 7,912 165 - 8,077
------- ---- ---- -------
10,010 209 - 10,219
------- ---- ---- -------
U.S. Government (including agencies) due after
one year through five years 3,000 - 39 2,961
Equity securities 50 - - 50
Mutual fund shares 2,266 - 112 2,154
------- ---- ---- -------
$15,447 $218 $151 $15,514
======= ==== ==== =======
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F-13
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 2 - Securities Available for Sale (Continued)
The unrealized losses, categorized by the length of time of continuous loss
position, and the fair value of related securities available for sale are as
follows:
Less than 12 Months More than 12 Months Total
------------------------ ------------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
(In Thousands)
December 31, 2006:
U.S. Government
(including agencies) $ - $ - $1,979 $ 21 $1,979 $ 21
Equity securities 3,357 222 - - 3,357 222
Mutual funds 2,226 142 - - 2,226 142
------ ---- ------ ----- ------ ----
$5,583 $364 $1,979 $ 21 $7,562 $385
====== ==== ====== ===== ====== ====
December 31, 2005:
U.S. Government
(including agencies) $1,991 $ 9 $ 970 $ 30 $2,961 $ 39
Mutual funds 2,154 112 - - 2,154 112
------ ---- ------ ----- ------ ----
$4,145 $121 $ 970 $ 30 $5,115 $151
====== ==== ====== ===== ====== ====
Management does not believe that any of the individual unrealized losses
represent an other-than-temporary impairment. The unrealized losses on mutual
funds are on shares in registered funds that invest primarily in money market
instruments and short to moderate term fixed rate securities. The unrealized
losses on U.S. Government agency securities are on fixed rate securities. These
unrealized losses are due to changes in market interest rates. The equity
securities and mutual funds are subject to market fluctuations. Management
believes that both the equity and mutual fund investment continue to be credit
worthy and that is no underlying financial situation that would cause concern.
The Bank and Investment Co. have the intent and ability to hold these securities
for a time necessary to recover the amortized cost. As of December 31, 2006,
there was one mutual fund, one equity and one U.S. Government securities in
unrealized loss positions compared to one U.S. Government security in an
unrealized loss position in the prior year.
There were no sales of securities available for sale during the years ended
December 31, 2006, 2005, and 2004.
--------------------------------------------------------------------------------
F-14
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 3 - Investment Securities Held to Maturity
December 31, 2006
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
U.S. Government (including agencies):
Within one year $ 57,996 $ - $ 374 $ 57,622
After one year through five years 59,310 16 1,110 58,216
After five years through ten years 51,026 4 565 50,465
-------- --- ------ --------
168,332 20 2,049 166,303
Obligations of state and political subdivisions:
After ten years 1,595 36 - 1,631
-------- --- ------ --------
$169,927 $56 $2,049 $167,934
======== === ====== ========
December 31, 2005
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
U.S. Government (including agencies):
Within one year $ 27,998 $ - $ 456 $ 27,542
After one year through five years 96,809 - 2,331 94,478
After five years through ten years 47,456 2 831 46,627
-------- --- ------ --------
172,263 2 3,618 168,647
Obligations of state and political subdivisions:
After ten years 815 22 - 837
-------- --- ------ --------
$173,078 $24 $3,618 $169,484
======== === ====== ========
The unrealized losses, categorized by the length of time of continuous loss
position, and the fair value of related investments held to maturity are as
follows:
--------------------------------------------------------------------------------
F-15
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 3 - Investment Securities Held to Maturity (Continued)
Less than 12 Months More than 12 Months Total
------------------------ ------------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
(In Thousands)
December 31, 2006:
U.S. Government (including agencies):
Within one year $2,992 $ 6 $ 54,630 $ 368 $ 57,622 $ 374
After one year
through five
years 996 4 56,380 1,106 57,376 1,110
After five years
through ten
years 21,945 113 25,519 452 47,464 565
------- ---- -------- ------ -------- ------
$25,933 $123 $136,529 $1,926 $162,462 $2,049
======= ==== ======== ====== ======== ======
December 31, 2005:
U.S. Government (including agencies):
Within one year $ - $ - $ 27,542 $ 456 $ 27,542 $ 456
After one year
through five
years 4,897 102 88,579 2,229 93,476 2,331
After five years
through ten
years 9,850 126 36,777 705 46,627 831
------- ---- -------- ------ -------- ------
$14,747 $228 $152,898 $3,390 $167,645 $3,618
======= ==== ======== ====== ======== ======
Management does not believe that any of the individual unrealized losses
represent an other-than-temporary impairment. The unrealized losses are on
issues that earn interest at a fixed interest rate and are due to changes in
market interest rates. The Bank and Investment Co. have the intent and ability
to hold these investments for a time necessary to recover the amortized cost. As
of December 31, 2006, there were 130 U.S. Government agencies , and two
obligations of state and political sub divisions in unrealized loss positions
compared to 117 and 2, respectively, in unrealized loss positions as of December
31, 2005.
There were no sales of investment securities held to maturity during the years
ended December 31, 2006, 2005, and 2004.
At December 31, 2006 and 2005, approximately $52.6 million and $172.3 million,
respectively, of investment securities held to maturity were callable within one
year.
See Note 9 for information as to investment securities held to maturity which
are pledged for borrowings.
--------------------------------------------------------------------------------
F-16
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 4 - Mortgage-Backed Securities Held to Maturity
December 31, 2006
-------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
----- ----- ------ ----------
(In Thousands)
Government National Mortgage Association $ 5,630 $ 33 $ 53 $ 5,610
Federal Home Loan Mortgage Corporation 79,822 261 1,104 78,979
Federal National Mortgage Association 53,880 244 934 53,190
Collateralized mortgage obligations 5,148 15 185 4,978
-------- ---- ------ --------
$144,480 $553 $2,276 $142,757
======== ==== ====== ========
December 31, 2005
-------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
----- ----- ------ ----------
(In Thousands)
Government National Mortgage Association $ 7,454 $ 59 $ 63 $ 7,450
Federal Home Loan Mortgage Corporation 80,155 427 1,610 78,972
Federal National Mortgage Association 58,389 398 987 57,800
Collateralized mortgage obligations 4,103 - 214 3,889
-------- ---- ------ --------
$150,101 $884 $2,874 $148,111
======== ==== ====== ========
The unrealized losses, categorized by the length of time of continuous loss
position, and the fair value of related mortgage-backed securities held to
maturity are as follows:
Less than 12 Months More than 12 Months Total
------------------------ ------------------------ -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
(In Thousands)
December 31, 2006:
Government National
Mortgage
Association $ - $ - $ 3,370 $ 52 $ 3,370 $ 53
Federal Home Loan
Mortgage
Corporation 4,384 14 52,420 1,090 56,804 1,104
Federal National
Mortgage
Association 1,817 4 35,077 930 36,894 934
Collateralized mortgage
obligations - - 3,208 185 3,208 185
------ --- ------- ------ -------- ------
$6,201 $18 $94,075 $2,257 $100,276 $2,276
====== === ======= ====== ======== ======
--------------------------------------------------------------------------------
F-17
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 4 - Mortgage-Backed Securities Held to Maturity (Continued)
Less than 12 Months More than 12 Months Total
------------------------ ------------------------ -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
(In Thousands)
December 31, 2005:
Government National
Mortgage
Association $ 1,579 $ 13 $ 2,626 $ 50 $ 4,205 $ 63
Federal Home Loan
Mortgage
Corporation 37,757 1,000 12,152 610 49,909 1,610
Federal National
Mortgage
Association 23,238 342 19,569 645 42,807 987
Collateralized mortgage
obligations - - 3,889 214 3,889 214
------- ------ ------- ------ -------- ------
$62,574 $1,355 $38,236 $1,519 $100,810 $2,874
======= ====== ======= ====== ======== ======
Management does not believe that any of the individual unrealized losses
represent an other-than-temporary impairment. The unrealized losses on
mortgage-backed securities relate primarily to fixed interest rate and to a
lesser extent adjustable interest rate securities. Such losses are the result of
changes in interest rates. The Bank and Investment Co. have the intent and
ability to hold these securities for a time necessary to recover the amortized
cost. As of December 31, 2006, there were 23 Government National Mortgage
Association, 76 Federal Home Loan Mortgage Corporation, 49 Federal National
Mortgage Association, and 6 Collateralized mortgage obligations, in unrealized
loss positions compared to 23, 72, 42, and 6, respectively, in unrealized loss
positions as of December 31, 2005.
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 2006, 2005, and 2004.
At December 31, 2006 and 2005, mortgage-backed securities held to maturity with
a carrying value of approximately $ 1,126,000 and $58,000, respectively, were
pledged to secure public funds on deposit.
--------------------------------------------------------------------------------
F-18
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable
December 31,
---------------------
2006 2005
-------- --------
(In Thousands)
Real estate mortgage loans:
Conventional 1-4 family $207,755 $191,634
Commercial and multi-family 65,848 53,614
-------- --------
273,603 245,248
-------- --------
Construction 23,956 20,020
-------- --------
Consumer:
Personal - 465
Passbook or certificate 1,314 1,071
Automobile 33 41
Equity and second mortgages 127,450 118,318
-------- --------
128,797 119,895
-------- --------
Commercial 3,724 2,351
-------- --------
Total Loans 430,080 387,514
-------- --------
Less:
Allowance for loan losses 1,169 878
Deferred loan fees and discounts 176 269
Loans in process 8,353 7,659
-------- --------
9,698 8,806
-------- --------
$420,382 $378,708
======== ========
At December 31, 2006 and 2005, loans serviced for the benefit of others totaled
approximately $7,436,000 and $7,206,000, respectively, which balances are
excluded from the above portfolio. The Bank has an agreement to sell residential
mortgages to the FHLB of New York (the "FHLB"). The maximum to be sold under the
agreement is $10.0 million and approximately $8.0 million has been sold as of
December 31, 2006. The agreement includes a maximum credit enhancement of
$177,500, which the Bank may be required to pay if realized losses on any of the
sold mortgages exceed the amount held in the FHLB's Spread Account. The FHLB is
funding the Spread Account at 3.55% of the outstanding balance of loans sold.
The Bank's historical losses on residential mortgages have been lower than the
amount being funded to the Spread Account. As such, the Bank does not anticipate
recognizing any losses and accordingly has not recorded a liability for the
credit enhancement. As compensation for the credit enhancement, the FHLB is
paying the Bank at rates of .07% to .10% of the outstanding loan balance in the
portfolio on a quarterly basis.
--------------------------------------------------------------------------------
F-19
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable (Continued)
The Bank retains the servicing on the loans sold to the FHLB and receives a fee
based upon the principal balance outstanding. During the years ended 2006 and
2005, the Bank recognized approximately $ 17,000 and $13,000, respectively, of
servicing fee income.
At December 31, 2006, 2005 and 2004, nonaccrual loans for which the accrual of
interest has been discontinued totaled approximately $363,000, $654,000, and
$787,000, respectively. Interest income on such loans is recognized only when
actually collected. During the years ended December 31, 2006, 2005 and 2004, the
Bank recognized interest income of approximately $12,000, $40,000, and $34,000,
respectively, on these loans. Interest income that would have been recorded had
the loans been on the accrual status, would have amounted to approximately
$22,000, $47,000, and $55,000 for the years ended December 31, 2006, 2005 and
2004, respectively. The Bank is not committed to lend additional funds to
borrowers whose loans have been placed on nonaccrual status.
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
December 31,
-----------------------------
2006 2005
---- ----
(In Thousands)
Recorded investment in impaired loans with recorded allowances $ 41 $ 68
Related allowance for loan losses (6) (11)
----- -----
$ 35 $ 57
===== =====
For the years ended December 31, 2006, 2005 and 2004, the average recorded
investment in impaired loans totaled approximately $64,000, $73,000, and
$112,000, respectively. Interest income of approximately $8,000, $13,000, and
$8,000, respectively, all recorded on the cash basis, was recognized on impaired
loans during the period of impairment.
The following is an analysis of the allowance for loan losses:
Years Ended December 31,
----------------------------------------------
2006 2005 2004
---- ---- ----
(In Thousands)
Balance - beginning $878 $750 $702
Provisions charged to operations 291 128 48
Losses charged to allowance - - -
------ ---- ----
Balance - ending $1,169 $878 $750
====== ==== ====
The Bank has granted loans to officers and directors of the Bank. Related party
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate amount of these loans at December 31, 2006 and 2005 was
approximately $727,000 and $758,000, respectively. During the year ended
December 31, 2006,, there were no new loans to related parties and repayments
totaled $31,000.
--------------------------------------------------------------------------------
F-20
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 6 - Premises and Equipment
December 31,
---------------------------
2006 2005
------- -------
(In Thousands)
Land held for future development $ 1,054 $ 1,054
------- -------
Construction in progress, including land of $503 2,598 569
------- -------
Land and land improvements 5,428 5,271
------- -------
Buildings and improvements 22,611 22,234
Accumulated depreciation (3,775) (3,223)
------- -------
18,836 19,011
------- -------
Furnishings and equipment 6,936 6,331
Accumulated depreciation (4,183) (3,557)
------- -------
2,753 2,774
------- -------
$30,669 $28,679
======= =======
Note 7 - Interest Receivable
December 31,
---------------------------
2006 2005
------- -------
(In Thousands)
Loans receivable $1,927 $1,576
Investment securities held to maturity 1,734 1,386
Mortgage-backed securities held to maturity 693 681
Securities available for sale 192 155
Other interest-earning assets 52 -
------ ------
$4,598 $3,798
====== ======
--------------------------------------------------------------------------------
F-21
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 8 - Deposits
December 31,
----------------------------------------------------------------
2006 2005
-------------------------- --------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
------ ------------- ------ -------------
(Dollars In Thousands)
Demand:
Non-interest bearing checking $ 25,109 0.00% $ 20,661 0.00%
Interest bearing checking 98,278 0.53% 100,721 0.54%
-------- --------
123,387 0.42% 121,382 0.45%
Savings and club 185,925 0.93% 208,109 0.93%
Certificates of deposit 316,660 4.30% 314,322 3.48%
-------- --------
$625,972 2.53% $643,813 2.08%
======== ========
Certificates of deposit with balances of more than $100,000 totaled
approximately $74,134,000 and $69,721,000 at December 31, 2006 and 2005,
respectively. Deposits in excess of $100,000 are not insured by the Federal
Deposit Insurance Corporation.
December 31,
----------------------------
2006 2005
-------- --------
(In Thousands)
One year or less $237,814 $204,013
After one to two years 32,923 54,833
After two to three years 16,984 22,264
After three to four years 23,715 10,512
After four to five years 5,094 22,514
After five years 130 186
-------- --------
$316,660 $314,322
======== ========
Interest expense on deposits consists of the following:
Years Ended December 31,
----------------------------------------------
2006 2005 2004
------- ------- ------
(In Thousands)
Demand $ 512 $ 477 $ 356
Savings and club 1,717 1,987 1,675
Certificates of deposit 12,479 8,278 5,361
------- ------- ------
$14,708 $10,742 $7,392
======= ======= ======
--------------------------------------------------------------------------------
F-22
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 9 - Federal Home Loan Bank ("FHLB") Advances
At December 31, 2006 and 2005, the Bank had an outstanding long-term FHLB
advance totaling $7.9 million and $9.7 million, respectively. The borrowing is
at a fixed rate of 4.49% and requires monthly principal and interest payment of
$186,385 with a final maturity of September 15, 2010. A schedule of the annual
principal obligation is as follows (in thousands):
Year ending December 31,
2007 $1,923
2008 2,011
2009 2,087
2010 1,842
2011 -
------
$7,863
======
At December 31, 2006 and 2005 the advance was secured by pledges of the Bank's
investment in the capital stock of the FHLB totaling $ 1,432,000 and $1,387,000,
respectively, and a specific pledge of investment securities held to maturity
with a par value totaling $ 26 million and $59 million, respectively.
At December 31, 2006 and 2005, the Bank also had available to it $79,667,700 and
$74,060,400, respectively, under a revolving line of credit and an additional
$79,667,700 and $74,060,400, respectively, under a Companion (DRA) Commitment,
both expiring July 31, 2007 and July 31, 2006, respectively, with the Federal
Home Loan Bank of New York. Borrowings are at the lenders cost of funds plus
0.25%. There were no outstanding borrowings under the line of credit or DRA at
December 31, 2006 and 2005.
Note 10 - Regulatory Capital Requirement
The Bank is subject to various regulatory capital requirements administered by
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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk-weighting, and other factors.
--------------------------------------------------------------------------------
F-23
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 10 - Regulatory Capital Requirement (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to adjusted total assets (as defined). The following
tables present a reconciliation of capital per accounting principles generally
accepted in the United States of America ("GAAP") and regulatory capital and
information as to the Bank's capital levels at the dates presented:
December 31,
----------------------------
2006 2005
-------- --------
(In Thousands)
GAAP capital $184,692 $137,858
Goodwill (572) (572)
Unrealized (gain) loss on securities available for sale 120 (38)
-------- --------
Core and tangible capital 184,240 137,248
General valuation allowance 1,169 867
-------- --------
Total Regulatory Capital $185,409 $138,115
======== ========
To be Well
Capitalized under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------ -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of December 31, 2006:
Total capital (to risk-weighted
assets) $185,409 40.55% $36,545 8.00% $45,682 10.00%
Tier 1 capital (to risk-weighted
assets) 184,240 40.30 27,409 6.00
Core (Tier 1) capital (to adjusted
total assets) 184,240 22.10 24,993 3.00 41,654 5.00
Tangible capital (to adjusted total
assets) 184,240 22.10 12,497 1.50 - -
As of December 31, 2005:
Total capital (to risk-weighted
assets) $138,115 32.74% $33,748 8.00% $42,185 10.00%
Tier 1 capital (to risk-weighted
assets) 137,248 32.53 - - 25,311 6.00
Core (Tier 1) capital (to adjusted
total assets) 137,248 17.21 23,925 3.00 39,874 5.00
Tangible capital (to adjusted total
assets) 137,248 17.21 11,962 1.50 - -
As of February 2, 2006, the most recent notification from the Office of Thrift
Supervision, the Bank, based on its actual capital amounts at September 30,
2005, was categorized as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total, risk-based, and Tier 1 leverage ratios of 10%, 6% and
5%, respectively. There are no conditions exiting or events which have occurred
since notification that management believes have changed the Bank's category.
--------------------------------------------------------------------------------
F-24
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 11 - Benefit Plans
Pension Plan
The Bank has a non-contributory pension plan covering all eligible
employees. The Bank's policy is to fund the pension plan with annual
contributions which equal the maximum amount deductible for federal income
tax purposes. The following table sets forth the plan's funded status and
components of net periodic pension expense:
December 31,
--------------------------
2006 2005
------ ------
(In Thousands)
Change in Benefit Obligation
Benefit obligation - beginning $ 7,795 $ 6,709
Service cost 345 282
Interest cost 450 412
Actuarial (gain) loss (220) 727
Benefits paid (262) (251)
Settlements (13) (84)
------ ------
Benefit obligation - ending 8,095 7,795
------ ------
Change in Plan Assets
Fair value of assets - beginning 7,022 6,038
Actual gain on plan assets 583 728
Employer contributions 252 591
Benefits paid (262) (251)
Settlements (13) (84)
------ ------
Fair value of assets - ending 7,582 7,022
------ ------
Funded status (513) (773)
Unrecognized net loss - 1,470
Unrecognized prior service liability - 180
------ ------
Prepaid (accrued) expense $ (513) $ 877
====== ======
Discount rate 6.13% 5.88%
Long-term rate 8.50% 8.50%
Salary increase rate 4.00% 3.50%
At December 31, 2006, unrecognized net loss of $ 1,196,000 and unrecognized
prior service liability of $ 120,000 were included in accumulated other
comprehensive income in accordance with SFAS No. 158. Approximately $38,000
and $ 42,000 if these balances are expected to be recognized in pension
expense during the year ended December 31, 2007.
--------------------------------------------------------------------------------
F-25
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 11 - Benefit Plans (Continued)
Pension Plan (Continued)
Years Ended December 31,
-------------------------------------------
2006 2005 2004
---- ---- ----
(In Thousands)
Net periodic pension expense
Service cost $345 $282 $289
Interest cost 450 412 387
Expected return on assets (596) (511) (471)
Amortization of:
Unrecognized transition obligation - 23 46
Unrecognized prior service liability 60 60 60
Unrecognized loss 67 30 47
---- ---- ----
Total pension expense $326 $296 $358
==== ==== ====
Discount rate 5.88% 5.88% 6.25%
Salary increase rate 4.00% 3.50% 4.00%
Plan Asset Allocations
The Bank's pension plan weighted-average asset allocations, by asset
category, are as follows:
October 1,
-------------------------
2006 2005
---- ----
Equity securities 73 % 72 %
Debt securities (Bond Mutual Funds) 27 28
--- ---
100 % 100 %
=== ===
Long-Term Rate of Return
The long term rate of return on assets assumption is based on historical
returns earned by equities and fixed income securities, adjusted to reflect
expectations of future returns as applied to the plan's target allocation
of asset classes. Equities and fixed income securities were assumed to earn
real rates of return in the ranges of 5-9% and 2-6%, respectively. The long
term inflation rate was estimated to be 3%. When these overall return
expectations are applied to the plan's target allocation, the result is an
expected rate of return of 8% to 10%.
Contributions
For the fiscal year ending December 31, 2007, the Bank expects to
contribute approximately $214,500 to the Plan.
--------------------------------------------------------------------------------
F-26
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 11 - Benefit Plans (Continued)
Estimated Future Benefit Payments
Benefit payments, which reflect expected future service as appropriate, are
expected to be paid for the years ended December 31 as follows (in
thousands):
2007 $ 389
2008 436
2009 533
2010 546
2011 546
2012 - 2016 2,984
Incremental Effect of Applying SFAS No. 158 on Individual Line Items in the
Consolidated Statements of Financial Condition
December 31, 2006
---------------------------------------------------------------
(In Thousands)
Before After Application
Application of Application of SFAS 158
SFAS 158 of SFAS 158
------------------- ---------------- -------------------
Deferred tax asset - pension - 526 526
Total assets 875,555 526 876,081
Liability for pension benefits - 1,316 1,316
Total liabilities 640,111 1,316 641,427
Accumulated Other Comprehensive Income 5,091 (790) 4,301
Total Stockholders' Equity 235,444 (790) 234,654
Savings and Investment Plan ("SIP")
The Bank sponsors a SIP pursuant to Section 401(k) of the Internal Revenue
Code, for all eligible employees. Employees may elect to save a percentage
of their compensation up to statutory limits which the Bank will match 50%
of the first 6% of the employee's contribution. The SIP expense amounted to
approximately $120,000, $116,000, and $107,000 during the years ended
December 31, 2006, 2005 and 2004, respectively.
Officers' Supplemental Pension Plans
The Bank has unfunded, non-qualified supplemental pension plans to provide
supplemental pension benefits to each senior officer ("Officer") of the
Bank. The plans provide for annual payments for ten years commencing when
each Officer reaches retirement age, as defined, or in the event of death,
disability or termination of employment, prior to retirement. The Bank has
accrued approximately $1,761,000 and $1,358,000 as of December 31, 2006 and
2005, respectively, towards this liability. Expense recorded for the plans
totaled approximately $437,000, $447,000, and $423,000 during the years
ended December 31, 2006, 2005 and 2004, respectively. During the years
ended December 31, 2006, 2005 and 2005 payments were paid to beneficiaries
and to individuals who terminated their employment in the amounts of $
34,000, $ 16,000 and $ 0, respectively.
--------------------------------------------------------------------------------
F-27
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 11 - Benefit Plans (Continued)
Employee Stock Ownership Plan
Effective upon completion of the Company's initial public offering July
2006, the Bank established an Employee Stock Ownership Plan ("ESOP") for
all eligible employees who complete a twelve-month period of employment
with the Bank, have attained the age of 21 and complete at least 1,000
hours of service in a plan year. The ESOP used $8,117,500 in proceeds from
a term loan obtained from the Company to purchase 811,750 shares of Company
common stock. The term loan principal is payable over 60 quarterly
installments through June 30, 2021. The interest rate on the term loan is
8.25%. Each year, the Bank intends to make discretionary contributions to
the ESOP, which will be equal to principal and interest payments required
on the term loan. The loan may be further repaid with dividends paid, if
any, on the unallocated Company common stock owned by the ESOP.
Shares purchased with the loan proceeds provide collateral for the term
loan and are held is a suspense account for future allocations among
participants. Contributions to the ESOP and shares released from the
suspense account are to be allocated among the participants on the basis of
compensation, as described by the Plan, in the year of allocation.
The ESOP is accounted for in accordance with Statement of Position 93-6,
"Accounting for Employee Stock Ownership Plans," which was issued by the
American Institute of Certified Public Accountants. Accordingly, ESOP
shares pledged as collateral were initially recorded as unearned ESOP
shares in the consolidated statements of financial condition. Thereafter,
on a quarterly basis, 13,529 shares are committed to be released,
compensation expense is recorded equal to the number of shares committed to
be released times the monthly average market price of the shares, and the
committed shares become outstanding for basic net income per common share
computations. ESOP compensation expense for the year ended December 31,
2006 was approximately $414,000. The status of Company shares in the ESOP
at December 31, 2006 is as follows:
Allocated shares -
Shares committed to be released 27,058
Unearned shares 784,692
-----------
Total ESOP Shares 811,750
===========
Fair value of unearned shares $12,994,500
===========
--------------------------------------------------------------------------------
F-28
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 12 - Income Taxes
The Bank qualifies as a thrift institution under the provisions of the Internal
Revenue Code and therefore must calculate its tax bad debt deduction using
either the experience or specific charge off method. Retained earnings at
December 31, 2006 and 2005, includes approximately $5.8 million of bad debt
deduction for tax purposes for which income taxes have not been provided. If
such amount is used for purposes other than for bad debt losses, including
distributions in liquidation, it will be subject to income tax at the then
current rate.
The components of income taxes are summarized as follows:
Years Ended December 31,
---------------------------------------------
2006 2005 2004
------ ------ ------
(In Thousands)
Current tax expense:
Federal income $3,126 $3,274 $3,479
State income 568 444 952
------ ------ ------
3,694 3,718 4,431
------ ------ ------
Deferred tax expense (benefit):
Federal income (1,100) 96 (131)
State income (200) 38 (44)
------ ------ ------
(1,300) 134 (175)
------ ------ ------
$2,394 $3,852 $4,256
====== ====== ======
The following table presents a reconciliation between reported income taxes and
the income taxes which would be computed by applying the federal income tax rate
of 35% to income before income taxes:
Years Ended December 31,
---------------------------------------------
2006 2005 2004
------ ------ ------
(In Thousands)
Federal income tax $2,675 $3,985 $4,154
Increases (reductions) in taxes resulting from:
New Jersey income tax, net of federal income
tax effect 239 313 590
Tax exempt interest on obligations of state and
political subdivisions (164) (162) (169)
Bank owned life insurance (191) (179) (186)
Surtax exemption (100) (100) (100)
Other items, net (65) (5) (33)
------ ------ ------
Total income tax expense $2,394 $3,852 $4,256
====== ====== ======
Effective income tax rate 31.3% 33.8% 35.9%
====== ====== ======
--------------------------------------------------------------------------------
F-29
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 12 - Income Taxes (Continued)
The effective income tax rate represents total income tax expense divided by
income before income taxes. The Investment Co. commenced operations in 2004.
Under New Jersey tax law, the Investment Co. is subject to a 3.6% state income
tax rate as compared to the 9.0% tax rate to which the Company and Bank are
subject. The presence of the Investment Co. during the years ended December 31,
2006 and 2005, resulted in income tax savings of approximately $366,000 and
$281,000, respectively, and reduced the consolidated effective income tax rate
by 4.8% and 2.5%, respectively.
The tax effects of existing temporary differences that give rise to deferred
income tax assets and liabilities are as follows:
December 31,
---------------------------
2006 2005
------- -------
(In Thousands)
Deferred loan fees $ 29 $ 45
Allowance for loss on loans and other reserves 451 348
Uncollected interest and late fees 21 29
Retirement benefits 697 538
Accumulated other comprehensive income-Pension 526 -
Charitable contributions 965 -
ESOP 53 -
Unrealized loss on securities available for sale 69 -
Other items 21 -
------- -------
Total Deferred Tax Assets 2,282 960
------- -------
Goodwill and other items (26) (36)
Pension expense (318) (347)
Depreciation (490) (476)
Capitalized interest (163) (161)
Unrealized gain on securities available for sale - (29)
------- -------
Total Deferred Tax Liabilities (997) (1,049)
------- -------
Net Deferred Tax Assets (Liabilities) $ 1,835 $ (89)
======= =======
Note 13 - Commitments and Contingencies
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual notional
--------------------------------------------------------------------------------
F-30
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 13 - Commitments and Contingencies (Continued)
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but primarily includes residential and income-producing
real estate.
Commitments to purchase securities are contracts for delayed delivery of
securities in which the seller agrees to make delivery at a specified future
date of a specified instrument, at a specified price or yield. Risks arise from
the possible inability of counterparties to meet the terms of their contracts
and from movements in securities values and interest.
The Bank had loan origination commitments outstanding as follows:
December 31,
--------------------------------------------------------------------
2006 2005
-------------------------------- --------------------------------
Rate Range Amount Rate Range Amount
---------- ------ ---------- ------
(Dollars In Thousands)
Mortgage loans:
Fixed rate 5.875% to 6.875% $1,888 5.38% to 8.25% $ 1,862
Adjustable rate 5.75% to 9/25% 720 5.5% to Prime +.5% 4,650
Equity loans:
Fixed rate 5.875% to 7.375% 2,590 4.95% to 6.45% 3,056
Floating rate 5.99% to 8.25% 389 Initial Rate 3.14% 1,351
------ -------
$5,587 $10,919
====== =======
At December 31, 2006 and 2005, undisbursed funds from approved lines of credit
under a homeowners' equity lending program amounted to approximately $31,524,000
and $33,815,000, respectively. The interest rate charged for any month on funds
disbursed under this program is prime plus 1.50% to prime less .50%. At December
31, 2006 and 2005, undisbursed funds from approved commercial lines of credit,
both secured and unsecured, amounted to approximately $12,529,000 and
$7,486,000, respectively. The interest rates charged on funds disbursed under
this program range from prime to prime plus 4.25%. Unless they are specifically
cancelled by notice from the Bank, these funds represent firm commitments
available to the respective borrowers on demand.
In June 2002, the Bank entered into an employment agreement with Mr. Perilli,
Chairman of the Board and executive vice president, to accommodate Mr. Perilli's
desire to continue providing his services to the Bank while reducing his time
commitment as a full-time officer and employee of the Bank. The agreement became
effective July 1, 2002. Mr. Perilli's salary on July 1, 2002 became his base
salary. Pursuant to the terms of the agreement, from July 1, 2002 to June 30,
2003, Mr. Perilli's annual salary was fixed at 90% of his base salary, from July
1,
--------------------------------------------------------------------------------
F-31
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 13 - Commitments and Contingencies (Continued)
2003 to June 2004, Mr. Perilli's annual salary was fixed at 80% of his base
salary, from July 1, 2004 to June 30, 2005, Mr. Perilli's annual salary was
fixed at 70% of his base salary, and from July 1, 2005 to June 30, 2007, Mr.
Perilli's salary is fixed at 50% of his base salary. In the event of Mr.
Perilli's death prior to June 30, 2007, the Bank will pay his estate the
aggregate of all unpaid salary from the date of death through June 30, 2007.
Pursuant to the terms of this agreement, Mr. Perilli is eligible for all
benefits and perquisites provided to employees and executive management
employees of the Bank, including bonuses.
The Bank had previously sold real estate on which it had established an escrow
for potential environmental remediation liabilities. Remediation was completed
and no additional claims were made against the Bank. The escrow balance of
$100,000 was closed and is reflected in other noninterest income in the
consolidated statement of income for the year ended December 31, 2005.
The Company and its subsidiaries, from time to time, may be party to litigation
which arises primarily in the ordinary course of business. In the opinion of
management, the ultimate disposition of such litigation should not have a
material effect on the consolidated financial statements.
Note 14 - Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
a forced liquidation sale. Significant estimates were used to develop fair value
data. Fair value estimates, methods and assumptions are set forth below.
Cash and Cash Equivalents, Interest Receivable and Accrued Interest Payable
The carrying amounts for cash and cash equivalents, interest receivable and
accrued interest payable approximate fair value because they mature or are
due in three months or less.
Securities
The fair values for both held to maturity and available for sale
mortgage-backed and investment securities, including commitments to
purchase such securities, are based on quoted market prices or dealer
prices, if available. If quoted market prices or dealer prices are not
available, fair value is estimated using quoted market prices or dealer
prices for similar securities.
Loans Receivable
The fair value of loans receivable is estimated by discounting the future
cash flows, using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities, of such loans.
Deposits
The fair value of demand, savings and club accounts is equal to the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated by discounting future cash flows using rates currently
offered for deposits of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing funds in
the market.
--------------------------------------------------------------------------------
F-32
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 14 - Fair Value of Financial Instruments (Continued)
Federal Home Loan Bank of New York Advances
Fair value is estimated using rates currently offered for assets and
liabilities of similar remaining maturities, or when available, quoted
market prices.
Loan Commitments
The fair value of commitments to originate loans and to fund unused lines
of credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The
carrying value, represented by the net deferred fee arising from the
unrecognized commitment, and the fair value, determined by discounting the
remaining contractual fee over the term of the commitment using fees
currently charged to enter into similar credit risk, are not considered
material for disclosure. The contractual amounts of unfunded commitments
are presented in Note 13 to financial statements.
The carrying amounts and estimated fair values of financial instruments are as
follows:
December 31,
-------------------------------------------------------
2006 2005
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 64,701 $ 64,701 $ 28,089 $ 28,089
Securities available for sale 19,331 19,331 15,514 15,514
Investment securities held to maturity 169,927 167,934 173,078 169,484
Mortgage-backed securities held to maturity 144,480 142,757 150,101 148,111
Loans receivable 420,382 418,846 378,708 373,927
Interest receivable 4,598 4,598 3,798 3,798
Financial liabilities:
Deposits 625,972 624,752 643,813 641,150
Federal Home Loan Bank of New York Advances 7,863 7,654 9,702 9,539
Accrued interest payable 1,247 1,247 850 850
Limitations
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial
instruments. Fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. Further, the
foregoing estimates may not reflect the actual amount that could be
realized
--------------------------------------------------------------------------------
F-33
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 14 - Fair Value of Financial Instruments (Continued)
Limitations
if all or substantially all of the financial instruments were offered for
sale. This is due to the fact that no market exists for a sizable portion
of the loan, deposit and off balance sheet instruments.
In addition, the fair value estimates are based on existing on-and-off
balance sheet financial instruments without attempting to value anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. Other significant assets that are not
considered financial assets include premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets
for many of the financial instruments. This lack of uniform valuation
methodologies introduces a greater degree of subjectivity to these
estimated fair values.
Note 15 - Formation of Mutual Holding Company and Stock Offering
On July 28, 2004, the Board of Directors of Roma Bank ("RB") adopted a Plan of
Reorganization from a Federal Mutual Savings Bank to a Federal Mutual Savings
Bank Holding Company (the "Plan"). Pursuant to the Plan, RB reorganized as
follows:
1. RB organized an interim federal stock savings bank as a wholly-owned
subsidiary ("Interim One").
2. Interim One organized an interim federal stock savings bank as a
wholly-owned subsidiary ("Interim Two").
3. Interim One organized a federal stock corporation (SHC) as a
wholly-owned subsidiary of Interim One.
4. RB exchanged its charter for a federal stock savings bank charter (the
"Bank").
5. Interim One cancelled its outstanding stock and exchanged its charter
for a federal mutual holding company charter (MHC).
6. Interim Two merged with and into the Bank, with the Bank surviving.
7. Former members of RB became members of the MHC.
8. MHC (formerly Interim One) received all of the stock of the Bank in
exchange for its shares of Interim Two stock.
9. The MHC transferred all of the outstanding shares of the Bank to SHC.
The Plan was approved by the Office of Thrift Supervision. Additionally, a
letter of non-objection was received from the Federal Deposit Insurance
Corporation.
A special meeting of depositors of RB ("Special Meeting") was held to approve
the Plan.
--------------------------------------------------------------------------------
F-34
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 15 - Formation of Mutual Holding Company and Stock Offering (Continued)
Following the completion of the Reorganization, all depositors who had
membership or liquidation rights with respect to the Bank continue to have such
rights solely with respect to the MHC as long as they continue to hold deposit
accounts with the Bank.
On July 11, 2006, the Company completed a minority stock offering in which it
sold 9,819,562 shares, or 30% of its outstanding common stock, including 811,750
shares to the Employee Stock Ownership Plan. The remaining 70% is held as
follows: 69% of the outstanding common stock or shares are owned by Roma
Financial Corporation, MHC and 1% or 327,318 shares were contributed to and are
owned by the Roma Bank Community Foundation, Inc.
Note 16 - Parent Only Financial Information
The Company operates its wholly-owned subsidiary, the Bank and the Bank's
wholly-owned subsidiaries. The consolidated earnings of the subsidiaries are
recognized by the Company using the equity method of accounting. Accordingly,
the consolidated earnings of the subsidiaries are recorded as an increase in the
Company's investment in the subsidiaries. The following are the condensed
financial statements for the Company (Parent Company only) as December 31, 2006,
and for the year ended December 31, 2006.
--------------------------------------------------------------------------------
F-35
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 16 - Parent Only Financial Information (Continued)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
----------------------------
2006 2005
-------- --------
(In Thousands)
Assets
Cash and amounts due from depository institutions $ 32,674 $ 800
Investment in subsidiaries 183,964 137,858
Securities available for sale 3,390 -
Securities held to maturity 4,999 -
ESOP loan receivable 7,976 -
Other assets 1,689 -
-------- --------
$234,692 $138,658
======== ========
Liabilities and Stockholders' Equity
Other Liabilities $ 38 $ -
Stockholders' equity 234,654 138,658
-------- --------
$234,692 $138,658
======== ========
CONDENSED STATEMENTS OF INCOME
From Inception
Year Ended to December 31,
December 31, 2006 2005
------------------------------------
(In Thousands)
Interest income $1,288 $ -
Equity in undistributed earnings of the subsidiaries 6,531 7,535
------ ------
7,819 7,535
Other expenses 3,464 -
Income before income tax 4,358 7,535
Income tax (benefit) (890) -
------ ------
Net Income $5,248 $7,535
====== ======
--------------------------------------------------------------------------------
F-36
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 16 - Parent Only Financial Information (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
From
Year Ended Inception to
December 31, December 31,
2006 2005
-------------------------------------
(In Thousands)
Cash Flows from Operating Activities
Net income $5,248 $7,535
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in undistributed earnings of the subsidiaries (6,531) (7,535)
Increase in other assets (1,689) -
Increase in other liabilities 38 -
------- -------
Net Cash Provided by (used in) Operating Activities (2,934) -
Cash Flows Provided by Financing Activities
Loan to ESOP (8,117) -
Repayment of loan to ESOP 141 -
Purchase of
Available for sale securities (3,580) -
Held to maturity securities (4,999) -
Capital contribution to subsidiary (48,035) -
------- -------
Issuance of common stock 99,398 800
------- -------
Net cash provided by Financing Activities 348,008 -
Net Increase in Cash and Cash Equivalents 31,874 800
Cash and Cash Equivalents - Beginning 800 -
------- -------
Cash and Cash Equivalents - Ending $32,674 $ 800
======= =======
--------------------------------------------------------------------------------
F-37
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 17 - Quarterly Financial Data (Unaudited)
Year Ended December 31, 2006
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands)
Interest income $9,311 $9,871 $10,674 $11,013
Interest expense 3,551 3,805 3,779 4,055
------ ------ ------ ------
Net Interest Income 5,760 6,066 6,895 6,958
Provision for loan losses 57 79 97 58
------ ------ ------ ------
Net Interest Income after Provision for
Loan Losses 5,703 5,987 6,798 6,900
Non-interest income 628 929 1,017 886
Non-interest expenses 4,274 4,469 7,847 4,616
------ ------ ------ ------
Income before Income Taxes 2,057 2,447 (32) 3,170
Income taxes 697 858 (133) 972
------ ------ ------ ------
Net Income $1,360 $1,589 $101 $2,198
====== ====== ==== ======
Year Ended December 31, 2005
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands)
Interest income $8,108 $8,439 $8,755 $9,330
Interest expense 2,090 2,564 2,847 3,400
------ ------ ------ ------
Net Interest Income 6,018 5,875 5,908 5,930
Provision for loan losses (16) (87) 82 149
------ ------ ------ ------
Net Interest Income after Provision for
Loan Losses 6,034 5,962 5,826 5,781
Non-interest income 439 657 978 842
Non-interest expenses 3,456 3,621 3,856 4,199
------ ------ ------ ------
Income before Income Taxes 3,017 2,998 2,948 2,424
Income taxes 1,050 996 1,051 755
------ ------ ------ ------
Net Income $1,967 $2,002 $1,897 $1,669
====== ====== ====== ======
--------------------------------------------------------------------------------
F-38
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 as of March 9, 2007.
ROMA FINANCIAL CORPORATION
By: /s/Peter A. Inverso
-------------------------------------
Peter A. Inverso
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below on March 9, 2007 by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ Peter A. Inverso /s/Maurice T. Perilli
----------------------------------------------- -------------------------
Peter A. Inverso Maurice T. Perilli
President, Chief Executive Officer and Director Chairman of the Board and
(Principal Executive Officer) Executive Vice President
/s/ Simon H. Belli /s/Louis A. Natale
----------------------------------------------- -------------------------
Simon H. Belli Louis A. Natale
Director Director
/s/ Rudolph A. Palombi /s/Robert H. Rosen
----------------------------------------------- -------------------------
Rudolph A. Palombi Robert H. Rosen
Director Director
/s/ Michele N. Siekerka /s/Sharon L. Lamont
----------------------------------------------- -------------------------
Michele N. Siekerka Sharon L. Lamont
Director Chief Financial Officer
(Principal Financial and Accounting Officer)