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, 2007
- 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
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(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
2300 Route 33, Robbinsville, New Jersey 08691
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 223-8300
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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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, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] YES [X] NO
The aggregate market value of the voting and non-voting equity held by
non-affiliates of the Registrant on June 29, 2007 (the last business day of the
Registrant's most recently completed second fiscal quarter) was $165.5 million.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2008 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
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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.
2
Roma Bank is a federally-chartered stock savings bank. It was
originally founded in 1920 and 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. Roma Bank operates from its
main office in Robbinsville, New Jersey, and ten branch offices located in
Mercer, Burlington and Ocean Counties, New Jersey. As of December 31, 2007, the
Bank had 156 full-time employees and 36 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 and commercial
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,
------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
----------------- ----------------- ---------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loans:
--------------
Real estate mortgage -
one-to-four family.......... $219,900 46.52% $207,755 48.31% $191,634 49.45% $201,385 58.95% $201,044 65.67%
Real estate mortgage -
multi-family and
commercial................... 80,537 17.04% 65,848 15.31 53,614 13.84 42,435 12.42 26,563 8.68
Commercial business............ 3,918 .83% 3,724 .87 2,351 0.61 1,635 0.48 1,187 0.39
Consumer:
Home equity and
second mortgage........... 130,085 27.52% 127,450 29.63 118,318 30.53 86,772 25.40 73,037 23.86
Passbook, certificate, overdraft 1,103 0.24% 1,314 0.30 1,071 0.28 1,410 0.41 1,151 0.37
Auto........................ 24 - 33 0.01 41 0.01 49 0.02 55 0.02
Other....................... - - - - 465 0.12 503 0.15 527 0.17
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Total consumer loans...... 131,212 27.76% 128,797 29.95 119,895 30.94 88,734 25.98 74,770 24.42
-------- ------ -------- ----- -------- ------ -------- ------ --------- ------
Construction................... 37,119 7.85% 23,956 5.57 20,020 5.16 7,423 2.17 2,589 0.84
-------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Total loans............... 472,686 100.00% 430,080 100.00% 387,514 100.00% 341,612 100.00% 306,153 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== --------- ======
Less:
Construction loans
in process.............. 12,037 8,353 7,659 5,151 1,065
Allowance for loan
losses................... 1,602 1,169 878 750 702
Deferred loan (costs)
and fees, net............ 174 176 269 461 553
-------- -------- -------- -------- ---------
13,813 9,698 8,806 6,362 2,320
-------- -------- -------- -------- ---------
Loans receivable, net..... $458,873 $420,382 $378,708 $335,250 $ $303,833
======== ======== ======== ======== ==========
5
Loan Maturity Schedule. The following tables set forth the maturity of
our loan portfolio at December 31, 2007. 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.
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 Construction Total
----------- -------------- -------- -------------- ----------- ---- ------------ -----
Amounts Due:
Within 1 Year............. $ 259 $25,013 $1,065 $ 642 $1,103 $ - $35,403 $ 63,485
-------- ------- ------ ------- ------ ---- ------- --------
After 1 year:
1 to 3 years ........... 413 3,033 221 4,503 - - 1,716 9,886
3 to 5 years ........... 1,480 5,819 812 7,289 - 24 - 15,424
5 to 10 years .......... 19,798 7,153 1,393 27,946 - - - 56,290
10 to 15 years ......... 39,235 9,018 90 38,554 - - - 86,897
Over 15 years .......... 158,715 30,501 337 51,151 - - - 240,704
-------- ------- ------ -------- ------ ---- ------- --------
Total due after one year.. 219,641 55,524 2,853 129,443 - 24 1,716 409,201
-------- ------- ------ -------- ------ ---- ------- --------
Total amount due ......... $219,900 $80,537 $3,918 $130,085 $1,103 $ 24 $37,119 $472,686
======== ======= ====== ======== ====== ==== ======= ========
6
The following table sets forth the amount of all loans at December 31,
2007 that are due after December 31, 2008.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Real estate mortgage -
one-to-four family...................... $196,162 $23,479 $219,641
Real estate mortgage -
multi-family and commercial.............. 31,477 24,047 55,524
Commercial business........................ 2,320 533 2,853
Construction - 1,716 1,716
Consumer:
Home equity and second mortgage loans... 110,466 18,977 129,443
Auto.................................... 24 - 24
-------- ------- --------
Total............................... $340,449 $68,752 $409,201
======== ======= ========
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 ARMs, 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 ARMs reset on an
annual basis and, with the exception of the seven year ARM, have two percent
annual increase caps and six percent lifetime adjustment caps. 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" 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
loans 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 concern
about the credit risks associated with these products. The Bank has never been
involved in any type of subprime lending. 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
variable rate, revolving home equity lines of credit, each with a $10 thousand
minimum and a $500 thousand maximum loan amount. Loan requests in excess of $500
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 may 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.
8
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.
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 typically 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) 75% 25 years
Multi-family (5+ units) 75% 25 years
Commercial real estate (owner 80% 25 years
occupied)
Commercial real estate (non-owner 75% 25 years
occupied)
Current 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 (generally five years), and
at each anniversary thereafter, based on a margin plus the Bank's base rate
(Wall Street Journal Prime).
9
The variable rate loans are indexed to various indexes including Wall
Street Journal Prime, the FHLB rate or Libor.
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 currently as
follows:
Collateral Maximum Loan-to-Value Maximum Amortization
---------- --------------------- --------------------
Land 60% - unimproved 1 year, with two 6-month
extensions
70% - with all municipal 1 year, with two 6-month
approvals extensions
70% - improved 1 year, with two six
-month extensions
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, 2007, our loans to one borrower
legal
10
limit was $21.5 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 loan to one borrower limit
are 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 $5.0 million. Prior to presentation to the Board, the loan request is
underwritten in accordance with policy and presented to the Officers Commercial
Loan Committee for its consideration and recommendation to the Board for
approval. The Board's determination to grant a credit in excess of the $5.0
million internal limit is based upon thorough underwriting which must clearly
demonstrate repayment ability and collateral adequacy. Additionally, 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, 2007, our largest single borrower had an aggregate loan
balance of approximately $7.3 million, secured by commercial real estate. Our
second largest single borrower had an aggregate loan balance of approximately
$4.6 million, secured by commercial real estate. Our third largest borrower had
a $4.2 million commercial real estate construction loan. At December 31, 2007,
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,
----------------------------------
2007 2006 2005
---- ---- ----
Loan originations: (In thousands)
Real estate mortgage - one-to-four family............. $33,562 $ 37,882 $ 19,139
Real estate mortgage - multi-family and commercial.... 26,726 17,991 28,301
Commercial business................................... 972 1,340 1,087
Construction.......................................... 23,611 12,997 11,326
Consumer:
Home equity loans and second mortgage................. 39,988 41,389 42,347
Passbook or certificate............................... 656 2,050 502
Other................................................. - 900 14,479
------- -------- --------
Total loan originations................................. 125,515 114,549 117,181
------- -------- --------
Loan purchases.......................................... - - -
------- -------- --------
Loans sold (mortgage loans)............................. 409 823 2,718
Loan principal repayments............................... 86,184 71,854 71,069
------- -------- --------
Total loans sold and principal repayments............... 86,593 72,677 73,787
------- -------- --------
Increase (decrease) due to other items.................... - - -
------- -------- --------
Net increase in loan portfolio............................ $38,922 $ 41,872 $ 43,394
======= ======== ========
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 advertisement 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 of New York, as well the standards of Fannie Mae and
Freddie Mac. The Bank's intention is to sell thirty year fixed rate mortgages
that qualify for sale to the secondary mortgage market in order to lessen its
interest rate risk.
11
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, 2007, $8.5 million had been delivered to the MPF program. In
addition to an origination premium, the Bank also realizes income from these
sales from credit enhancement fees and loan servicing income.
Aside from participations, the Bank did not purchase loans from any
third parties in the three years ended December 31, 2007. At December 31, 2007,
the total outstanding balance of loan participations purchased was $2.3 million,
representing participations in commercial construction loans with area banks and
thrifts.
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 prescribed
by lending policies. Two committee members may together approve non-commercial
loans up to $500 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 is one of the approving
members. Non-commercial loans over $500 thousand require the approval of the
Board of Directors.
Commercial lending approval authority is as follows: up to $750
thousand, any two of the following: a commercial loan officer and either the
senior vice president of lending, or the president or the executive vice
president; over $750 thousand and up to $1.5 million, any two of the following:
a commercial loan officer or the senior vice president of lending and the
president or the executive vice president; over $1.5 million and up to $5.0
million, the loan committee; and over $5.0 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 write down 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, 2007, we held no real estate
owned.
12
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 principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan. At December 31, 2007,
we had approximately $6.9 million 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, 2007, the allowance for loan losses totaled $1.6
million, non-performing loans totaled $6.9 million, and the ratio of allowance
for loan losses to non-performing loans was 23.3%. Subsequent to December 31,
2007, $2.6 million of the total non-performing loans of $6.9 million were paid
in full and $780 thousand of non-performing loans were brought to a status under
30 days. Management believes that the non-performing loans are well secured and
any losses are not expected to be material. The loans that remain in the
non-performing status are to nine borrowers, 91.4% commercial loans and the
remaining one to four family and consumer loans. The commercial loans represent
are secured as follows: $1.9 million secured by commercial rental real estate;
$1.7 million commercial construction loans secured by real estate; and. $.6
million to a non-profit organization, secured by real estate.
At December 31,
----------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate mortgage - one-to-four family..... $ 406 $ 362 $ 563 $ 650 $ 708
Home equity and second mortgage loans ........ - 1 91 137 200
Real estate multi-family and commercial ...... 6,483 - - - -
------ ------ ------ ------ ------
Total .................................... 6,889 363 654 787 908
------ ------ ------ ------ ------
Total non-performing loans ..................... 6,889 363 654 787 908
------ ------ ------ ------ ------
Real estate owned .............................. - - - - -
------ ------ ------ ------ ------
Total non-performing assets .................... $6,889 $ 363 $ 654 $ 787 $ 908
====== ====== ====== ====== ======
Total non-performing loans to total loans ...... 1.46 % 0.08% 0.17% 0.23% 0.30%
====== ====== ====== ====== ======
Total non-performing loans to total assets ..... 0.76% 0.04% 0.08% 0.11% 0.14%
====== ====== ====== ====== ======
Total non-performing assets to total assets..... 0.76% 0.04% 0.08% 0.11% 0.14%
====== ====== ====== ====== ======
13
During the year ended December 31, 2007, gross interest income of $670
thousand would have been recorded on loans accounted for on a non-accrual basis
if those loans had been current, and $370 thousand of interest on such loans was
included in income for the year ended December 31, 2007.
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, 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 the dates indicated. At
each date, all of the classified assets and special mention designated assets
were loans.
At December 31,
---------------------------------------
2007 2006 2005
---- ---- ----
(In thousands)
Special Mention.......... $ 5,886 $ 1,717 $ 587
Substandard.............. 6,098 49 133
Doubtful................. - - -
Loss..................... - - -
------- ------- -------
Total.................. $11,984 $ 1,766 $ 720
======= ======= =======
At December 31, 2007, $1.0 million of the loans classified as "special
mention" and $5.8 million of the loans classified as "substandard" are also
classified as non-performing assets. The special mention and substandard loans
not categorized as non-performing are primarily commercial loans representing
approximately $4.9 million secured by real estate.
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
14
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 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 none charged off in 2004, 2005, and
2006 and $59 thousand in 2007, 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%, 11% and 10% in 2004, 2005, 2006 and
2007, respectively, as well as the increasing percentage of multi-family and
commercial real estate and commercial loans relative to total loans, which rose
from 12.90% at December 31, 2004, to 14.45% at December 31, 2005, 16.18% at
December 31, 2006 and 17.87% at December 31, 2007. Higher provisions in 2005,
2006 and 2007, relative to 2004, reflected the higher amounts of loans
classified as "special mention" and in 2007, as "substandard".
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,
---------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance balance (at beginning of period).... $ 1,169 $ 878 $ 750 $ 702 $ 637
--------- --------- --------- --------- ----------
Provision for loan losses.................... 492 291 128 48 85
--------- --------- --------- --------- ----------
Charge-offs:
Passbook, certificate, overdraft............ 59 - - - 20
--------- --------- --------- --------- ----------
Total charge-offs....................... 59 - - - 20
--------- --------- --------- --------- ----------
Recoveries.................................... - - - - -
--------- --------- --------- --------- ----------
Net (charge-offs) recoveries.................. (59) - - - (20)
---------- --------- --------- --------- ----------
Allowance balance (at end of period).......... $ 1,602 $ 1,169 $ 878 $ 750 $ 702
========= ========= ========= ========= ==========
Total loans outstanding....................... $ 472,686 $ 430,080 $ 387,514 $ 341,612 $ 306,153
========= ========= ========= ========= ==========
Average loans outstanding..................... $ 438,187 $ 400,486 $ 349,758 $ 318,154 $ 276,078
========= ========= ========= ========= ==========
Allowance for loan losses as a percent of
total loans outstanding.................... 0.34% 0.27% 0.23% 0.22% 0.23%
========= ========= ========= ========= ==========
Net loans charged off as a percent of
average loans outstanding.................. 0.01% -% -% -% 0.01%
========= ========= ========= ========= ==========
Allowance for loan losses to
non-performing loans....................... 23.25% 322.04% 134.25% 95.30% 77.31%
========= ========= ========= ========= ==========
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,
------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
----------------- ---------------- --------------- ---------------- -----------------
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........... $ 231 46.52% $ 238 48.31% $435 49.45% $442 58.95% $461 65.67%
Real estate mortgage -
Multi-family and
commercial............... 1,089 17.04 746 15.31 122 13.84 93 12.42 61 8.68
Commercial business............ 34 .83 5 .87 5 0.61 4 0.48 3 0.39
Consumer:
Home equity and second
mortgage loans........... 137 27.52 133 29.63 268 30.53 191 25.40 167 23.86
Passbook,certificate,overdraft 6 0.24 39 0.30 2 0.28 3 0.41 3 0.38
Auto......................... - - - 0.01 - 0.01 - 0.01 - 0.02
Other........................ - - - - 1 0.12 1 0.15 1 0.17
Construction................... 105 7.85 15 5.57 45 5.16 16 2.17 6 0.85
------ ------ ------ ------ ---- ------ --- ------ --- ------
Total allowance........... $1,602 100.00% $1,169 100.00% $878 100.00% $750 100.00% $702 100.00%
====== ------ ====== ====== ==== ====== ==== ====== ==== ======
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, 2007, 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
18
such 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, 2007, we had
$83.3 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 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. The Bank has reviewed its portfolio of mortgage-backed
securities and believes that it does not have any subprime exposure in this
area.
19
The following table sets forth the carrying value of our securities
portfolio at the dates indicated.
At December 31,
-----------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(In thousands)
Securities Available for Sale:
-----------------------------
Mutual fund shares ............................... $ 2,375 $ 2,226 $ 2,154 $ 2,112 $ 1,036
Equity securities ................................ 3,443 3,447 50 50 50
Mortgage-backed securities issued by Freddie Mac.. 1,292 1,524 130 149 308
U.S. government obligations ...................... - 1,979 2,961 981 1,000
Obligations of state and political
subdivisions ................................. 10,128 10,155 10,219 10,251 11,650
-------- -------- -------- -------- --------
Total securities available for sale ........ 17,238 19,331 15,514 13,543 14,044
-------- -------- -------- -------- --------
Investment Securities Held to Maturity:
--------------------------------------
U.S. government obligations ...................... 123,283 168,332 172,263 159,257 151,889
Obligations of states and political
subdivisions ................................. 4,423 1,595 815 874 933
-------- -------- -------- -------- --------
Total investment securities
held to maturity ...................... 127,706 169,927 173,078 160,131 152,822
-------- -------- -------- -------- --------
Mortgage-Backed Securities Held to Maturity:
-------------------------------------------
Government National Mortgage Association ......... 4,276 5,630 7,454 9,167 9,457
Federal Home Loan Mortgage Corporation ........... 84,648 79,822 80,155 60,086 54,533
Federal National Mortgage Association ............ 47,387 53,880 58,389 63,913 64,944
Collateralized mortgage obligations .............. 7,788 5,148 4,103 5,140 6,333
-------- -------- -------- -------- --------
Total mortgage-backed securities
held to maturity ....................... 144,099 144,480 150,101 138,306 135,267
-------- -------- -------- -------- --------
Total ........................................... $289,043 $333,738 $338,693 $311,980 $302,133
======== ======== -------- ======== ========
20
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of our securities
portfolio at December 31, 2007. This table shows contractual maturities and does
not reflect repricing or the effect of prepayments. Actual maturities may
differ.
At December 31, 2007
-------------------------------------------------------------------------------------------------------
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years 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 $ 2,375 4.80% $ - - $ - - $ - - $ 2,375 4.80% $ 2,375
Equity securities 3,443 - - - - - - - 3,443 - 3,443
U.S. government obligations 18,000 3.74% 44,313 4.70% 48,975 5.78% 11,995 6.02% 123,283 5.12% 123,418
Obligations of states and
political subdivisions - - 2,069 4.20% 5,359 4.41% 7,123 5.79% 14,551 4.98% 14,538
Government National
Mortgage Association 5 8.69% 103 11.06% 42 4.89% 4,126 4.80% 4,276 4.96% 4,313
Federal Home Loan
Mortgage Corporation - - 2,319 5.32% 26,183 4.86% 57,438 5.32% 85,940 5.18% 86,062
Federal National Mortgage
Association 6 6.64% 17,389 4.92% 13,135 4.73% 16,857 6.51% 47,387 5.43% 47,623
Collateralized Mortgage
Obligations - - - - 6,014 4.72% 1,774 5.50% 7,788 4.90% 7,734
------- ------- ------- ------- -------- --------
Total $23,829 3.30% $66,193 4.79% $99,708 5.24% $99,313 5.62% $289,043 5.11% $289,506
======= ======= ======= ======= ======== ========
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 52.6% of total average deposits at December 31, 2007. 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, 2007, $89.6
million, or 25.5%, 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,
------------------------------------------------------------------------------------------
2007 2006 2005
------------------------------- -------------------------- ------------------------------
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........ $ 23,781 3.8% 0.00% $ 25,653 4.0% 0.00% $ 15,844 2.58% 0.00%
Interest-bearing demand............ 94,239 14.9 0.55 94,204 14.6 0.54 100,241 16.31 0.48
Money market demand................ 91,172 14.5 1.00 99,929 15.5 0.90 114,364 18.61 0.97
Savings and club................... 89,473 14.2 .87 108,435 16.8 0.75 105,004 17.09 0.85
Certificates of deposit............ 331,859 52.6 4.55 315,613 49.1 3.95 279,026 45.41 2.97
-------- ------ -------- ------ -------- ------
Total deposits.................. $630,524 100.00% 2.75% $643,834 100.00% 2.28% $614,479 100.00% 1.75%
======== ====== ==== ======== ====== ======== ======
23
The following table sets forth certificates of deposit classified by
interest rate as of the dates indicated.
At December 31,
-------------------------------------
Interest Rate 2007 2006 2005
------------- ---- ---- ----
(In thousands)
0.00-1.99% $ 1,252 $ 1,536 $ 11,096
2.00-2.99% 3,568 20,655 68,197
3.00-3.99% 48,816 71,116 152,801
4.00-4.99% 240,815 172,509 82,228
5.00% and above 57,515 50,844 -
--------- -------- --------
Total $351,966 $316,660 $314,322
======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 2007.
Amount Due
-------------------------------------------------------------------------------------
Within After
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
------ --------- --------- --------- --------- ------- -----
Interest Rate (In thousands)
-------------
0.00-1.99% $ 1,252 $ - $ - $ - $ - $ - $ 1,252
2.00-2.99% 3,562 6 - - - - 3,568
3.00-3.99% 26,367 13,450 8,971 18 10 - 48,816
4.00-4.99% 190,090 25,589 22,938 1,023 1,152 23 240,815
5.00-5.99% 48,371 4,199 - 4,945 - - 57,515
-------- ------- ------- ------ ------ ----- --------
Total $269,642 $43,244 $31,909 $5,986 $1,162 $ 23 $351,966
-======= ======= ======= ====== ====== ===== ========
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, 2007
--------------------
Maturity Period (In thousands)
---------------
Within three months............................... $27,658
Three through six months.......................... 14,196
Six through twelve months......................... 28,529
Over twelve months................................ 19,254
-------
$89,637
=======
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. At December 31, 2007, the Bank's borrowing limit with the
Federal Home Loan Bank of New York was $164.1 million.
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
and continued to use it on occasion during 2006. 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. As of December 31, 2007, the outstanding balance of such five
year advance totaled $5.9 million. This advance has a fixed interest rate of
4.49%.
In the fourth quarter of 2007, we took a ten year advance totaling
$23.9 million at a fixed rate of 3.90% for ten years, callable at three years.
Interest is paid quarterly. The borrowing occurred in October 2007 and
approximately $8 million of the proceeds will be used for the capital
contribution to RomAsia Bank and the other $15 million of proceeds was invested
in mortgage-backed securities at an initial spread of approximately 1.67%.
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 two direct subsidiaries, Roma Bank and
RomAsia Bank. RomAsia Bank is in organization and has an application pending
with the Office of Thrift Supervision to be a federal savings bank. As of
December 31, 2007, the Company has advanced $903,000 thousand as organizational
capital. The Company intends to maintain a 60% ownership interest of RomAsia
Bank upon completion of organization. As presently contemplated, RomAsia Bank
will need to raise $15.0 million in initial capital, including the 60%
investment made by the Company.
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,
2007 were $259.6 million. Its net income for 2007 was $7.6 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, 2007 were $509 thousand. Its operating revenue for 2007
consisted of $1.3 million in premiums earned from the placement of title
insurance and related title company services. Its net income for 2007 was $56
thousand.
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. As an FDIC-insured bank, the Bank is subject to FDIC
insurance assessments. Following enactment of the Federal Deposit Insurance
Reform Act of 2005, the FDIC adopted a revised risk-based assessment system to
determine assessment rates to be paid by FDIC-insured institutions. Under this
revised assessment system, risk is defined and measured using an institution's
supervisory ratings as well as certain other risk measures, including certain
financial ratios. The annual rates for 2008 for institutions in Risk Category I
range from 5 to 7 basis pints and the rates for institutions in Risk categories
II, III and IV are 10, 28 and 43 basis pints, respectively. These rates may be
offset by a one-time assessment credit held by an institution, based on the
assessment base of that institution as of December 31, 1996, and in the future
by dividends that may be declared by the FDIC if the reserve ratio of the
Deposit Insurance Fund increases above a certain amount. The FDIC may raise or
lower these assessment rates based on various factors to achieve a reserve
ratio, which the FDIC currently has set at 1.25 percent of insured deposits.
In addition to deposit insurance assessments, all FDIC-insured
institutions are required to pay special assessments to the FDIC to fund the
repayment of debt obligations of the Financing Corporation (FICO), a
government-sponsored entity that was formed in 1987 to recapitalize the Federal
Savings and Loan Insurance Corporation. At December 31, 2007, the annualized
rate established by the FDIC for the FICO assessment was 1.14 basis points per
$100 of insured deposits. 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," 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.
28
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
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, 2007, 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.
29
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, 2007, 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 through June 2007 the U.S. Federal Reserve has
increased its target federal funds rate. However, in the last two quarters of
2007 and in the first quarter of 2008 rates were dropped. 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 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 during the first half of 2007. In the last two
quarters of 2007 we saw a gradual return to a more normal yield curve, but
continued to be challenged as the market adjusted loans rates accordingly, but
the adjustment of deposit rates downward lagged.
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
30
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, 2007, our allowance for loan losses was $1.6 million, representing
0.34% of outstanding loans and 23.3% 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, 2007, our loan portfolio included $80.5 million of
commercial and multi-family real estate loans and $3.9 million of commercial
business loans, together amounting to 17.9% of our total loan portfolio, and
$37.1 million of construction loans, representing 7.9% 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.
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 $121.6 million at December 31, 2007 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 ten offices are
located, was 5.69% at June 30, 2007, 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.
31
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, a
new branch office in Plumsted, New Jersey in the first quarter of 2007, and two
new branch offices in January of 2008 in Whiting and Bordentown, New Jersey. 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.
Item 1B. Unresolved Staff Comments
----------------------------------
Not applicable.
Item 2. Properties
-------------------
At December 31, 2007, our net investment in property and equipment
totaled $33.2 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.
32
Year Facility Leased or Net Book Value at
Office Location Opened Owned December 31, 2007
--------------- ------ ----- -----------------
(In thousands)
Corporate Headquarters and 2005 Owned $13,132
Washington Town Center Office:
2300 Route 33
Robbinsville, NJ
Chambersburg Office: 1962 Owned 353
485 Hamilton Avenue
Trenton, NJ
Mercerville Office: 1971 Owned 778
500 Route 33
Mercerville, NJ
Yardville Office: 1984 Owned 841
4500 South Broad Street
Yardville, NJ
West Trenton Office: 1986 Owned 939
79 West Upper Ferry Road
West Trenton, NJ
Hamilton Center City Office: 1991 Owned 3,958
1155 Whitehorse-Mercerville Road
Hamilton, NJ
South Trenton Office: 1993 Owned 758
1450 South Broad Street
Trenton, NJ
Florence Township Office 2003 Owned 2,477
2150 Route 130 North
Florence Township
Burlington, NJ
Plumsted Office 2007 Owned 2,748
400 Route 539
Cream Ridge, NJ
Bordentown Office 2008 Leased 59
213 Route 130
Bordentown, NJ 08505
Whiting Office 2008 Leased 1,288
451 Lacey Road
Whiting, NJ 08759
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 or their
subsidiaries at December 31, 2007 that would have a material effect on our
operations or income.
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, 2007.
33
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 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.
2007 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
Quarter ended March 31, 2007 $ 16.56 $ 14.76 $.06
Quarter ended June 30, 2007 $ 17.28 $ 15.50 $.06
Quarter ended September 30, 2007 $ 17.50 $ 13.62 $.06
Quarter ended December 31, 2007 $ 18.00 $ 15.35 $.06
(1) Minority stock offering was completed on July 11, 2006 and trading
commenced on 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, 2008, there were approximately 2,689 shareholders of
record of the Company's common stock, which includes registered shareholders as
well as beneficial owners who hold through various brokerage firms, banks and
clearning agents.
The Company's common stock commenced trading during the third quarter
of 2006. A stock performance graph for the year ended December 31, 2007 is
presented.
On August 9, 2007, the Company announced a ten percent open market
stock repurchase plan, equivalent to 981,956 shares, in open market, based on
stock availability, price and the Company's financial performance. The
repurchase was completed on August 27, 2007. A new stock repurchase plan for
five percent of the then outstanding shares, equivalent to 441,880 shares, was
announced on October 24, 2007. The following table reports information regarding
repurchases of the Company's common stock which all occurred during the quarter
ended December 31, 2007.
34
Total Number of Maximum Number of
Total Number Average Shares Purchased As Shares That May Yet
of Shares Price Paid Part of Publicly Be Purchased Under
Period Repurchased Per Share Announced Plans The Plan
------ ----------- --------- --------------- --------
October 1-31, 2007 14,000 $ 17.63 14,000 427,880
November 1-30, 2007 218,000 17.11 218,000 209,880
December 1-31, 2007 130,000 16.28 130,000 79,880
------- ------- ------- ------
362,000 $ 16.83 362,000 79,880
======= ======= ======= ======
Set forth below is a stock performance graph comparing the cumulative
total shareholder return on the Company's common stock with (a) the cumulative
total shareholder return on stocks included in the NASDAQ Composite Index and
(b) the cumulative total shareholder return on stocks included in the SNL MHC
Index, in each case assuming an investment of $100 as of July 12, 2006 (the date
the Company's common stock began trading on the NASDAQ Stock Market following
the closing of the Company's initial public stock offering). The cumulative
total returns for the indices and the Company are computed assuming the
reinvestment of dividends that were paid during the period. It is assumed that
the investment in the Company's common stock was made at the initial public
offering price of $10.00 per share.
[GRAPHIC OMITTED]
------------------------------------------------------------------------------
7/12/2006 12/31/2006 12/31/2007
------------------------------------------------------------------------------
NASDAQ Composite Index $100 116 127
------------------------------------------------------------------------------
SNL MHC Index 100 124 107
------------------------------------------------------------------------------
Roma Financial Corporation 100 117 112
------------------------------------------------------------------------------
35
The NASDAQ Composite Index measures all NASDAQ domestic and
international based common type stocks listed on the NASDAQ Stock Market. The
SNL MHC Index was prepared by SNL Securities, LC, Charlottesville, Virginia and
includes all publicly traded mutual holding companies.
There can be no assurance that the Company's future stock performance
will be the same or similar to the historical stock performance shown in the
graph above. The Company neither makes nor endorses any predictions as to stock
performance.
36
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,
--------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Total assets $907,114 $875,533 $797,760 $711,815 $671,728
Loans receivable, net 458,873 420,382 378,708 335,250 303,833
Mortgage backed securities
held to maturity 144,099 144,480 150,101 138,306 135,267
Securities available for sale 17,238 19,331 15,514 13,543 14,044
Investment securities held to maturity 127,706 169,927 173,078 160,131 152,822
Cash and cash equivalents 95,302 64,701 28,089 19,944 28,218
Goodwill 572 572 572 - -
Deposits 651,030 625,972 643,813 576,300 544,605
Federal Home Loan Bank borrowings 28,940 7,863 9,702 - -
Total stockholders' equity 218,303 234,654 138,658 131,393 123,818
At December 31,
--------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(In thousands)
Summary of Operations:
Interest income $45,769 $40,869 $34,632 $31,148 $31,430
Interest expense 17,783 15,190 10,901 7,392 8,287
------- ------- ------- ------- -------
Net interest income 27,986 25,679 23,731 23,756 23,143
Provision for loan losses 492 291 128 48 85
------- ------- ------- ------- -------
Net interest income after provision for
loan losses 27,494 25,388 23,603 23,708 23,058
Non-interest income 4,060 3,460 2,916 1,571 1,630
Non-interest expense 20,327 21,206 15,132 13,411 12,544
------- ------- ------- ------- -------
Income before income taxes and
minority interest 11,227 7,642 11,387 11,868 12,144
Provisions for income taxes 4,134 2,394 3,852 4,256 4,437
------- ------- ------- ------- -------
Net income before minority interest 7,093 5,248 7,535 7,612 7,707
Minority interest 123 - - - -
------- ------- ------- ------- -------
Net Income 7,216 5,248 7,535 7,612 7,707
======= ======= ======= ======= =======
Net income per share -
basic and diluted $0.23 $0.19 $0.33 $0.33 $0.34
======= ======= ======= ======= =======
Dividends per share $0.24 $0.00 $0.00 $0.00 $0.00
======= ======= ======= ======= =======
Weighted number of common
shares outstanding 31,563 27,305 22,584 22,584 22,584
======= ======= ======= ======= =======
37
At December 31,
------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(In thousands)
Performance Ratios:
Return on average assets (net income
divided by average total assets 0.82% 0.62% 0.99% 1.10% 1.18%
Return on average equity (net income
divided by average equity) 3.12 2.89 5.55 6.02 6.38
Net interest rate spread 2.71 2.78 3.09 3.44 3.48
Net interest margin on average
interest-earning assets 3.42 3.28 3.36 3.65 3.74
Average interest-earning assets to average
interest-bearing liabilities 1.33x 1.24x 1.17x 1.19x 1.19x
Efficiency ratio (Non-interest expense
divided by the sum of net interest
income and non-interest income) 63.43% 72.78% 55.71% 51.69% 49.06%
Non-interest expense to average assets 2.30 2.52 1.91 1.85 1.81
Asset Quality Ratios:
Non-performing loans to total loans 1.46 0.08 0.17 0.23 0.30
Non-performing assets to total assets 0.76 0.04 0.08 0.11 0.14
Net charge-offs to average loans
outstanding 0.01 -- -- -- 0.01
Allowance for loan losses to total loans 0.34 0.27 0.23 0.22 0.23
Allowance for loan losses to
non-performing loans 23.25 322.04 134.25 95.30 77.31
Capital Ratios:
Average equity to average assets
(average equity divided by average
total assets 26.19 21.53 17.90 18.33 18.45
Equity to assets at period end 24.07 26.80 17.38 18.46 18.43
Tangible equity to tangible assets
at period end 24.01 26.91 17.22 18.45 18.42
Number of Offices:
Offices 11 9 8 7 7
38
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, 2007, total loans
comprised 51% of our total assets and our securities portfolio comprised 32% of
our total assets. The most significant change in interest-earning assets from
the prior year was a $37.7 million or 9.4% increase in the average balance of
loans receivable net from $400.5 million at December 31, 2006 to $438.2 million
at December 31, 2007. At year end, actual loans receivable, net, totaled $458.9
million. During 2007 and 2006, a key goal of management was growth in the loan
portfolio, particularly multi-family and commercial real estate loans.
Multi-family and commercial real estate loans increased by 22.3%, or $14.7
million, from 2006 to 2007 and 22.8%, or $12.2 million, from 2005 to 2006.
During 2007, the amount of securities held to maturity that were called
increased as rates dropped. To the extent those calls were not yet deployed into
loans and other assets, the proceeds from the calls were invested in short-term
interest earning deposits, contributing to a $30.6 million, or 47.3%, 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,
2007, our total deposits were $651.0 million, compared to $626.0 million at
December 31, 2006. Our borrowings from the Federal Home Loan Bank of New York
were $28.9 million compared to $7.9 million a year earlier. In the fourth
quarter of 2007, the Bank borrowed $23.0 million from the Federal Home Loan Bank
of New York which resulted in the increase from year to year. The $25.0 million,
or 4.0%, increase in deposits was primarily in certificates of deposits which
increased as a percent of total deposits from 50.6% in 2006 to 54.1% in 2007.
Management continued to be challenged during 2007 to balance the rate of
attrition while containing the cost of funds. Management was able to limit
non-interest bearing deposits to a decrease of $.5 million to $24.6 million, or
a decrease of 2%. Savings and club accounts fell by $10.0 million to $176.0
million, as depositors continued to move money from this category to
certificates of deposit.
Our net interest income increased 9.0% to $28.0 million in 2007 from
$25.7 million in 2006. The net interest spread decreased to 2.71% from 2.80% in
2006, as the average cost of interest bearing liabilities climbed 46 basis
points, while the yield on interest-earning assets improved only 37 basis
points. For 2007, the average cost of interest-bearing liabilities was 2.88% and
the average yield on interest-earning assets was
39
5.59%. Total interest income increased 12.0% due to a 4.6% increase in the
average balance of interest-earning assets and a 37 basis point increase in
average yield. Interest expense increased 17.1% primarily due to a 46 basis
point increase in the average cost of interest-bearing liabilities which more
than offset a decrease of 1.8% in the average balance of interest-bearing
liabilities. Net interest income increased due to the reinvestment of maturing
securities in the second half of 2006 into higher yielding securities and loans
as well as into interest earning cash and cash equivalents.
Our results of operation 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 income increased $.6 million to $4.1 million in 2007,
compared to $3.5 million in 2006. The increase was primarily the result of
overdraft protection fees for a full year in 2007, compared to five months in
2006. Non-interest expense includes salaries and employee benefits, occupancy
expenses and other general and administrative expenses. Non-interest expense
decreased by $.9 million or 4.2% to $20.3 million in 2007, compared to $21.2
million in 2006. The increase was primarily due to a $1.6 million increase in
salaries and benefits, offset by a $3.5 million decrease in contributions due to
the one time contribution in 2006 to the Roma Bank Community Foundation in
conjunction with our initial public offering.
Net income for the year ended December 31, 2007 was $7.2 million, an
increase of $2.0 million or 38.5% from $5.2 million for the year ended December
31, 2006. The increase was primarily due to increased net interest income and
the contribution in 2006 to the Foundation, partially offset by increases in
non-interest expenses.
Total assets increased $31.6 million or 3.5% to $907.1 million from
$875.5 million at December 31, 2006. Cash and cash equivalents increased $30.6
million from year to year primarily due to calls of securities held to maturity
which to the extent they were not deployed into loans were invested in overnight
funds. Loans receivable increased $38.5 million while investment securities held
to maturity decreased $42.2 million to $127.7 million at December 31, 2007.
Stockholders' equity decreased $16.4 million or 7.0% to $218.3 million
at December 31, 2007. The decrease was primarily due to the use of $22.8 million
of capital to repurchase stock, offset by net income; a reduction in other
comprehensive income; and, a reduction in equity for allocated ESOP shares.
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.
40
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-backed
securities and investment securities. Over the last few years we have focused on
building a non-residential loan portfolio.
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.
41
Comparison of Financial Condition at December 31, 2007 and December 31, 2006
General. Our total assets increased by $31.6 million, or 3.6%, to
$907.1 million at December 31, 2007 compared to $875.5 million at December 31,
2006, primarily due to an increase in cash and cash equivalents and loans
receivable net, offset by a decrease in investment securities held to maturity.
Cash and Cash Equivalents. Cash and cash equivalents increased $30.6
million, or 47.3%, to $95.3 million at December 31, 2007 from $64.7 million at
December 31, 2006. Cash received from calls of investment securities held to
maturity to the extent it was not utilized for loans originations was invested
overnight in money market funds.
Securities available for sale. The carrying value of securities
available for sale decreased $2.1 million, or 10.9%, to $17.2 million at
December 31, 2007 compared to $19.3 million for the prior year.
Investment securities held to maturity. Investment securities held to
maturity decreased $42.2 million, or 24.8%, to $127.7 million at December 31,
2007 from $169.9 million at December 31, 2006. The reduction in the investments
held to maturity portfolio resulted from scheduled maturities and calls totaling
$103.5 million. The weighted yield of the portfolio at December 31, 2007 was
4.98%.
Mortgage-backed securities. Mortgage-backed securities decreased $.4
million, or .2%, to $144.1 million at December 31, 2007 from $144.5 million at
December 31, 2006. The average yield on mortgage-backed securities at December
31, 2007 was 5.24%.
Loans. Loans receivable, net, increased $38.5 million, or 9.20% to
$458.9 million at December 31, 2007 compared to $420.4 million at December 31,
2006. Conventional one-to-four family mortgage loans increased $12.1 million, or
5.8%, to $219.9 million at December 31, 2007 compared to $207.8 million the
prior year. Loans in this category increased primarily because of our mortgage
promotion in March. Demand for mortgage loans for the second year continued to
be slow. Commercial and multi-family mortgages, construction and commercial
loans increased, in the aggregate $28.0 million, or 29.9%, to $121.6 million at
December 31, 2007 compared to $93.5 million at December 31, 2006. This was the
second year that commercial and multi-family mortgages, construction and
commercial loans, in the aggregate, had growth in excess of 20%. Home equity and
consumer loans increased $2.4 million, or 1.9%, to $131.2 million at December
31, 2007 compared to $128.8 million at December 31, 2006. Demand for equity and
consumer loans remained slow in 2007.
Premises and equipment. Premises and equipment increased $2.5 million,
or 8.1%, to $33.2 million at December 31, 2007 compared to $30.7 million in the
prior year. The increase resulted primarily from the completion of our Plumsted
branch and retail center and our new branches in Whiting and Bordentown, New
Jersey. The Whiting and Bordentown branches opened in January 2008, bringing our
total network to ten branches plus our Robbinsville main office.
Bank Owned Life Insurance. Bank-owned-life-insurance ("BOLI") increased
$2.6 million to $18.8 million at December 31, 2007 compared to $16.2 million the
prior year. In July of 2007, the Bank invested an additional $2.0 million in
BOLI policies.
42
Other assets. Other assets increased $1.2 million to $5.0 million at
December 31, 2007, compared to $3.8 million a year earlier. The increase was
primarily a result of the consolidated other assets of RomAsia, Inc. totaling
$.5 million and the investment of $.3 million in a joint venture.
Deposits. Deposits increased by $25.1 million, or 4.0%, to $651.0
million at December 31, 2007 compared to $626.0 million at December 31, 2006.
Non-interest bearing checking decreased $.5 million, or 2.0%, to $24.6 million
at December 31, 2007 compared to $25.1 million at December 31, 2006.
Interest-bearing checking accounts, increased $.2 million or .2%, to $98.5
million at December 31, 2007 compared to $98.3 million at December 31, 2006. The
weighted average interest rate of total checking accounts, including both
interest-bearing and non-interest bearing was .43% at December 31, 2007 compared
to .42% the prior yearend. Savings and club accounts decreased $10.0 million, or
5.4%, to $176.0 million at December 31, 2007 compared to $185.9 million at
December 31, 2006. Savings and club accounts decreased in both 2007 and 2006 as
depositors continue to move funds into certificates of deposit with higher
yields. The weighted average interest rate of savings and club accounts at
December 31, 2007 was .96% compared to .93% in the prior yearend. Certificates
of deposit increased $35.3 million, or 11.1%, to $352.0 million at December 31,
2007, compared to $316.7 million at December 31, 2006. The weighted average
interest rate of certificates of deposit increased 29 basis points to 4.59% at
December 31, 2007 compared to 4.30% at the prior year end. The weighted average
interest rate on total deposits increased 29 basis points to 2.82% at December
31, 2007 compared to 2.53% at the prior year end. Fierce competition in our
marketplace for deposits continued to be a challenge during 2007.
Federal Home Loan Bank. Federal Home Loan Bank of New York advances
increased $21.1 million to $28.9 million at December 31, 2007 compared to $7.9
million at December 31, 2006. In October 2007, the Company borrowed $23.0
million from the Federal Home Loan Bank of New York. The advance is for ten
years, with a three year call, at 3.9% interest, with interest only paid
quarterly. The Company has an additional advance with principal and interest
payable at 4.49% maturing in September 2010 with a balance at December 31, 2007
of $5.9 million compared to $7.9 million at December 31, 2006.
Other Liabilities. Other liabilities increased $1.2 million to $6.0
million at December 31, 2007 compared to $4.8 million at December 31, 2006. The
increase was primarily due to increases in dividends payable, accounts payable,
and accrued interest expense offset by a decrease in our pension liability.
Stockholders' equity. Stockholders' equity decreased $16.4 million, or
6.9%, to $218.3 million at December 31, 2007. The decrease was primarily a
result of the repurchase of 1,343,956 shares of Company common stock under both
a ten percent and a five percent repurchase plan for $22.8 million, and $2.1
million in dividends declared to minority shareholders. This decrease was
partially offset by net income the allocation of ESOP shares and changes in
other comprehensive income.
Comparison of Operating Results for the Years Ended December 31, 2007 and
December 31, 2006
General. Net income for the year ended December 31, 2007 was $7.2
million, an increase of $2.0 million, or 38.5%, from $5.2 million for the year
ended December 31, 2006. The increase was primarily related to the contribution
of $3.4 million in 2006 to the Roma Bank Community Foundation, increases in net
interest income of $2.3 million, and non-interest income of $0.6 million
partially offset, by an increase in non-interest expense of $2.5 million, after
excluding the 2006 contribution to the Foundation.
43
Net Interest Income. Net interest income increased $2.3 million, or
8.9%, to $28.0 million compared to $25.7 million for the year ended December 31,
2006. Our net interest rate spread decreased 9 basis points to 2.71%, compared
to 2.80% the prior year. While there was a 37 basis point improvement in the
average yield on interest-earning assets, which increased to 5.59% this year,
from 5.22% last year, the average cost of interest bearing liabilities increased
46 basis points to 2.88% compared to 2.42% in the prior year.
Interest Income. Total interest income increased $4.9 million, or
11.7%, to $45.8 million for the year ended December 31, 2007 compared to $40.9
million for 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 $2.7 million, or 10.9%, to $27.4
million for the year ended December 31, 2007 compared to $24.7 million for the
prior year. The increase resulted from an increase of 8 basis points in the
average yield on loans to 6.26%, as well as, an increase in the average balance
of loans from $400.5 million to $438.2 million, an increase of $37.7 million
over 2006.
Interest income on mortgage-backed securities held to maturity
decreased minimally from $7.2 million in 2006 to $7.0 million in 2007. The
average yield on mortgage-backed securities held to maturity increased 16 basis
points to 5.01% compared to 4.85% in the prior year. This was offset by a $7.2
million decrease in the average balance of mortgage-backed securities held to
maturity to $140.5 million compared to $147.7 million for the prior year.
Interest income on investment securities available for sale and held to
maturity increased $1.4 million, or 20.0%, to $8.4 million for the year ended
December 31, 2007 compared to $7.0 million for the prior year. The average yield
on investment securities available for sale and held to maturity increased 99
basis points to 4.61%, compared to 3.62% in the prior year. The average balance
of investment securities available for sale and held to maturity decreased $11.3
million to $181.2 million in 2007 compared to $192.5 million in the prior year.
The decrease in the average balance was primarily due to a large number of
securities called in the last quarter of 2007.
Interest income on other interest-earning assets increased $.9 million
to $2.9 million in 2007 compared to $2.0 million in the prior year. The average
yield on other interest-bearing assets increased 28 basis points to 5.01% in
2007 compared to 4.73% in the prior year. The average balance of other
interest-bearing assets increased $16.5 million to $58.4 million in 2007
compared to $41.9 million in 2006. To the extent that maturities and calls on
mortgage-backed securities and investment securities available for sale and held
to maturity were not utilized for loans they were invested in short-term
overnight funds.
Interest Expense. Total interest expense increased $2.6 million, or
12.6%, to $17.8 million for the year ended December 31, 2007, compared to $15.2
million in the prior year. The increase resulted from an increase in the average
cost of interest-bearing liabilities. The average cost of interest-bearing
liabilities increased 46 basis points to 2.88% compared to 2.42% in the prior
year. The average balance of interest-bearing liabilities decreased $11.2
million, or 1.8%, to $617.5 million compared to $628.7 million in the prior
year.
44
Interest expense on deposits increased $2.6 million, or 17.7%, to $17.3
million in 2007, compared to $14.7 million in 2006. Average interest-bearing
demand deposits and the average cost of interest-bearing demand deposits
remained relatively unchanged from year to year. Average savings and club
accounts decreased $27.7 million, or 13.3%, to $180.6 million compared to $208.4
million in the prior year. The average cost of interest-bearing savings and club
accounts increased 12 basis points to .94% compared to .82% in the prior year.
The average cost of interest-bearing certificates of deposits increased 60 basis
points to 4.55%, compared to 3.95% in the prior year. The average balance of
interest-bearing certificates of deposit increased $16.3 million, or 5.2%, to
$331.9 million compared to $315.6 million in 2006. The Company continued to
experience in 2007 a shift of depositors funds from savings and club accounts
into higher yielding certificates of deposit.
Interest expense on Federal Home Loan Bank of New York advances
decreased $17 thousand to $463 thousand compared to $482 thousand in the prior
year. The average cost of borrowings decreased 26 basis points to 4.31% compared
to 4.57% in the prior year. In late October 2007, the Company borrowed $23.0
million in the form of a ten year advance with a three year call, interest only
quarterly at 3.90%. The Company continued to make regular monthly principal and
interest payments on its five year advance maturing in September 2010 with a
rate of 4.49%.
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 losses increased $201 thousand to $492 thousand
for the year ended December 31, 2007 compared to $291 thousand in the prior
year. During 2007, total loans increased $42.6 million to $472.7 million at
December 31 2007 compared to $430.1 million at December 31, 2006. The allowance
for loan loss was .34% of total loans at December 31, 2007 compared to .27% in
the prior year.
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 on loans, commissions on the sale of title insurance policies,
bank-owned life insurance income, and other miscellaneous income. Non-interest
income increased $.6 million or 17.1%, to $4.1 million in 2007 compared to $3.5
million in the prior year.
Commissions on sale of title policies decreased minimally to $1.3
million compared to $1.4 million in the prior year, primarily due to the decline
in the real estate market.
45
Fees and service charges on deposits and loans increased $.5 million,
or 69.6%, to $1.3 million compared to $.8 million in the prior year. Fees and
service-charges on deposits increased $300 thousand, or 42.3%, to $1.0 million
compared to $700 thousand in the prior year. In August 2006 the Bank implemented
an overdraft protection program. The increase in fees and services charges on
deposits in 2007 is primarily due to that program generating income for a full
year in 2007. Fees and service charges on loans increased $200 thousand to $300
thousand in 2007 compared to $100 thousand in the prior year. The increase is
primarily related to a $100 thousand increase in late fees and a $70 thousand
increase in early payoff penalties and line of credit fees.
Income from bank-owned life insurance increased in 2007 primarily due
to the purchase of $2.0 million of additional policies in July of 2007.
Other non-interest income increased $52 thousand to $679 thousand in
2007 compared to $627 thousand in the prior year.
Non-Interest Expense. Non-interest expense decreased $.9 million, or
3.8%, to $20.3 million in 2007 compared to $21.2 million in the prior year. The
decrease was primarily due to the contribution of $3.4 million in 2006 to the
Roma Bank Community Foundation as part of our initial public offering. Excluding
the contribution, non-interest income would have increased $2.5 million.
Salaries and employee benefits increased $1.6 million, or 15.5%, to
$11.9 million in 2007 compared to $10.3 million in the prior year. The increase
in salaries and employee benefits was primarily due to the following: (1) the
opening of our Plumsted branch in January 2007; (2) staffing late in 2007 for
our branch openings in Whiting and Bordentown, NJ in January 2008; (3) a full
year of expense for the Roma Bank Employee Stock Ownership plan which was
implemented in conjunction with our initial public offering in July 2006; and
(4) consolidation of salary and related expenses of approximately $.2 million
for our 60% owned subsidiary, RomAsia, Inc. in organization.
Net occupancy expense of premises increased approximately $197 thousand
primarily due to the opening of the Plumsted branch in January 2007 and initial
costs for our Whiting and Bordentown branches which opened in January 2008.
Equipment costs increased $194 thousand to $1.7 million for the year
ended December 31, 2007 compared to $1.5 million in the prior year. The increase
was primarily due to general overall increases in costs plus the additional
branches.
Data processing costs, advertising and Federal Insurance Premium
expense increased $56 thousand to $2.3 million compared to $2.1 million in the
prior year.
Charitable contributions decreased $3.5 million from year to year
primarily because of the contribution in 2006 to the Foundation.
Other non-interest expense increased $.5 million to $2.6 million in
2007 compared to $2.1 million in the prior year. The increase is primarily
related to $.4 million in consolidated costs from the Company's 60% owned
subsidiary RomAsia, Inc.
46
Provision for Income Taxes. The provision for income taxes increased
$1.7 million to $4.1 million in 2007 compared to $2.4 million in the prior year.
The increase is primarily due to increased pre-tax income and the decreased
portion of income coming from tax-exempt sources.
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.
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 in both years. The average yield on
mortgage-backed 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 overnight funds. 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.
47
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 in all deposit categories while
mitigating increases in the cost of funds.
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 losses 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.
48
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 $544 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 $202
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 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.
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 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 2006.
Net occupancy expense increased $500 thousand, or 43.5%, to $1.7
million in 2006 compared to $1.2 million in 2005. The increase in this category
is primarily due to the full year of operations 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.
49
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.
50
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. No
tax equivalent adjustments have been made.
For the Year Ended December 31,
At December 31, ------------------------------------------------------------------------------
2007 2007 2006 2005
----------------- -------------------------- ------------------------ -------------------------
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) $458,873 6.26% $438,187 $27,446 6.26% $400,486 $24,748 6.18% $349,758 $20,662 5.91%
Mortgage-backed
securities held
to maturity 144,099 5.24 140,499 7,041 5.01 147,727 7,166 4.85 150,586 7,158 4.75
Investment securities: (2)
Tax-exempt 14,551 4.98 12,335 538 4.36 11,450 503 4.39 10,829 490 4.53
Taxable 130,393 5.12 168,844 7,818 4.63 181,038 6,468 3.57 172,610 5,638 3.27
Other interest-earning
assets (3) 90,830 3.93 58,403 2,926 5.01 41,932 1,984 4.73 22,646 684 3.02
-------- -------- ------- ------ ------- -------- -------
Total interest-earning assets 838,746 5.61 818,268 45,769 5.59 782,633 40,869 5.22 706,429 34,632 4.90
======= ------- -------
Non-interest-earning assets 68,368 64,081 59,532 50,749
-------- -------- ------ --------
Total assets 907,114 882,349 $842,165 $757,178
======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing demand 98,481 0.54 94,239 515 0.55 $ 94,204 $512 0.54 $100,241 $477 0.48
Savings and club 175,972 0.96 180,645 1,691 0.94 208,364 1,717 0.82 219,368 1,987 0.91
Certificates of deposit 351,966 4.59 331,859 15,114 4.55 315,613 12,479 3.95 279,026 8,278 2.97
Federal Home Loan Bank
borrowings 28,940 4.02 10,734 463 4.31 10,548 482 4.57 3,694 159 4.30
-------- -------- ------- ------ ------- -------- -------
Total interest-bearing
liabilities 655,359 2.98 617,477 17,783 2.88 628,729 15,190 2.42 602,329 10,901 1.81
------- ------- ------
Non-interest-bearing
liabilities 32,973 33,319 32,140 19,327
-------- -------- ------ --------
Total liabilities 688,332 650,796 660,869 621,656
-------- -------- ------- --------
Minority interest 479 479 - -
-------- -------- -------- --------
Stockholders' equity 218,303 231,074 181,296 135,522
-------- -------- ------- --------
Total liabilities and
stockholders' equity $907,114 $882,349 $842,165 $757,178
======== ======== ======== ========
Net interest income $27,986 $25,679 $23,731
======= ======= =======
Interest rate spread (4) 2.63% 2.71% 2.80% 3.09%
==== ==== ==== =====
Net yield on interest-
earning assets (5) 3.42% 3.28% 3.36%
==== ==== =====
Ratio of average interest
-earning assets
to average interest-
bearing liabilities 1.33x 1.24x 1.17x
==== ==== ====
(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 theverage 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.
51
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,
2007 vs. 2006 2006 vs. 2005
Increase (Decrease) Due To Increase (Decrease) Due To
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In thousands)
Interest and dividend income:
Loans receivable $ 2,344 $ 354 $ 2,698 $ 3,145 $ 941 $ 4,086
Mortgage-backed securities,
held to maturity (357) 232 (125) (147) 155 8
Investment securities:
Tax-exempt 38 (3) 35 28 (15) 13
Taxable (460) 1,810 1,350 294 536 830
Other interest earnings assets 819 123 942 913 387 1,300
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 2,384 $ 2,516 $ 4,900 $ 4,233 $ 2,004 $ 6,237
======= ======= ======= ======= ======= =======
Interest expense:
Interest-bearing demand $ - $ 3 $ 3 $ (28) $ 63 $ 35
Savings and club (251) 225 (26) (100) (170) (270)
Certificates of deposit 667 1,967 2,634 1,094 3,107 4,201
Advances from Federal Home Loan Bank 9 (27) (18) 313 10 323
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 425 $ 2,168 $ 2,593 $ 1,279 $ 3,010 $ 4,289
======= ======= ======= ======= ======= =======
Change in net interest income $ 1,959 $ 348 $ 2,307 $ 2,954 $(1,006) $ 1,948
======= ======= ======= ======= ======= =======
52
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,
2007, the Bank had outstanding commitments to originate loans of $4.4 million,
and unused lines of credit of $58.3 million. Certificates of deposit scheduled
to mature in one year or less at December 31, 2007 totaled $269.6 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 2007,2006 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. In October of 2007, the Bank borrowed $23.0 million
from the FHLBNY at 3.90%, interest only quarterly, for ten years with a three
year call. At December 31, 2007, the Bank's borrowing limit with the FHLBNY was
$164.1 million.
53
The following table discloses our contractual obligations and commitments as of
December 31, 2007.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 years
----- ------ --------- --------- -------
(In thousands)
Federal Home Loan Bank
borrowings $28,940 $ 2,011 $ 3,929 $ - $ 23,000
======= ======= ======= ======= ========
Total
Amounts Less Than Over
Committed 1 Year 1-3 Years 4-5 Years 5 years
--------- ------ --------- --------- -------
(In thousands)
Lines of credit (1) $58,301 $58,301 $ - $ - $ -
Construction loans in process 12,037 12,037 - - -
Other commitments to
extend credit 4,362 4,362 - - -
------- ------- ------- --------
Total $74,700 $74,700 $ - $ - $ -
======= ======= ====== ====== =======
(1) Represents amounts committed to customers
The Bank has non-cancelable operating leases for branch offices. The following
is a schedule by years of future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year at December 31, 2007:
Years Ended December 31:
(in thousands)
2008 $ 184
2009 185
2010 186
2011 188
2012 192
Thereafter 2,571
------
Total Minimum Payments Required $3,506
======
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, 2007, 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, 2007, we
had no significant off-balance sheet commitments.
54
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, 2007, 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.
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 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.
55
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.
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.
In March 2007, the FASB ratified EITF Issue No. 06-11, "Accounting for
Income Tax benefits of Dividends on Share-Based Payment Awards." EITF 06-11
requires companies to recognize the income tax benefit realized from dividends
or dividend equivalents that are charged to retained earnings and paid to
employees for nonvested equity-classified employee share-based payment awards as
an increase to additional paid-in capital. EITF 06-11 is effective for fiscal
years beginning after September 15, 2007. The Company does not expect EITF 06-11
will have a material impact on its financial position, results of operations or
cash flows.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No.
06-19 "Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements" (EITF 06-10). EITF 06-10 provides guidance for determining a
liability for the postretirement benefit obligation as well as recognition and
measurement of the associated asset on the basis of the terms of the collateral
assignment agreement. EITF 06-10 is effective for fiscal years beginning
December 15, 2007. The Company is currently assessing the impact of EITF 06-10
on its consolidated financial position and results of operations.
On September 7, 2006, the Task Force reached a conclusion on EITF Issue
No. 06-5, "Accounting for Purchases of Life Insurance - Determining the Amount
That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance ("EITF 06-5"). The scope of EITF 06-5
consists of six separate issues relating to accounting for life insurance
policies purchased by entities protecting against the loss of "key persons." The
six issues are clarifications of previously issued guidance on FASB Technical
Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The adoption of EITF Issue No. 06-05 did not have a material
effect on the consolidated financial statements.
In May 2007, the FASB issued FASB FSP FIN 48-1 "Definition of
Settlement in FASB Interpretation No. 48". FSP FIN 48-1 provides guidance on how
to determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. FSP FIN 48-1 in effective
retroactive to January 1, 2007. The adoption of FSB FUB 48-1 did not have a
material impact on the consolidated financial position, results of operations or
cash flows.
FASB statement No. 141 (R) "Business Combinations" was issued in
December of 2007. This Statement establishes principles and requirements for how
the acquirer of a business recognizes and measures
56
in its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. The Statement also
provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. The guidance will become effective as of the beginning of
a company's fiscal year beginning after December 15, 2008. This new
pronouncement will impact the Company's accounting for business combinations
completed beginning January 1, 2009.
FASB statement No. 160 "Noncontrolling Interests in Consolidated
Financial Statements--an amendment of ARB No. 51" was issued in December of
2007. This Statement establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the beginning of a
company's fiscal year beginning after December 15, 2008. The Company is
currently evaluating the potential impact the new pronouncement will have on its
consolidated financial statements.
Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces
Question 6 of Section D.2 of Topic 14, "Share-Based Payment," of the Staff
Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the
views of the staff regarding the use of the "simplified" method in developing an
estimate of expected term of "plain vanilla" share options and allows usage of
the "simplified" method for share option grants prior to December 31, 2007. SAB
110 allows public companies which do not have historically sufficient experience
to provide a reasonable estimate to continue use of the "simplified" method for
estimating the expected term of "plain vanilla" share option grants after
December 31, 2007. SAB 110 is effective January 1, 2008.
Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments
Recorded at Fair Value Through Earnings" expresses the views of the staff
regarding written loan commitments that are accounted for at fair value through
earnings under generally accepted accounting principles. To make the staff's
views consistent with current authoritative accounting guidance, the SAB revises
and rescinds portions of SAB No. 105, "Application of Accounting Principles to
Loan Commitments." Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its financial
statements.
In December 2007, the FASB issued proposed FASB Staff Position (FSP)
157-b, "Effective Date of FASB Statement No. 157," that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity's financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply, however, to an entity that applies Statement 157
in interim or annual financial statements before proposed FSP 157-b is
finalized. The Company is currently evaluating the impact, if any, that the
adoption of FSP 157-b will have on the Company's operating income or net
earnings.
57
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, 2007. The net portfolio values shown in this
table were calculated by the Office of Thrift Supervision, based on information
provided by the Bank.
December 31, 2007
Net Portfolio Value Net Portfolio Value
as % of Present Value of Assets
Net Portfolio Basis Point
Changes in rate $ Amount $ Change % Change Value Ratio Change
--------------------- ------------------ ------------------- ------------------ ---------------------- ---------------
+300 bp 172,308 -32,928 (16)% 20.11% (256) bp
+200 bp 184,422 -20,814 (10)% 21.11% (157) bp
+100 bp 195,872 -9,364 (5)% 22.00% (67) bp
0 bp 205,236 - - 22.89% -
-100 bp 210,986 5,720 3 % 23.01% 34 bp
(1) The -200bp and -300bp scenarios are not shown due to the low prevailing
interest rate environment.
58
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, 2007. 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, 2007.
(b) Internal Control Over Financial Reporting
1. Management's Annual Report on Internal Control Over Financial
Reporting.
Management's report on the Company's internal control over financial
reporting appears in the Company's financial statements that are contained in
this Annual Report on Form 10-K immediately following Item 15. Such report is
incorporated herein by reference.
2. Report of Independent Registered Public Accounting Firm.
The report of Beard Miller Company LLP on the Company's internal
control over financial
59
reporting appears in the Company's financial statements that are contained in
this Annual Report on Form 10-K immediately following Item 15. Such report is
incorporated herein by reference.
3. Changes in Internal Control Over Financial Reporting.
During the last quarter of the year under report, there was no change
in the Company's internal control over financial reporting 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 "Proposal I --
Election of Directors" and "Additional Information About Directors and Executive
Officers" in the definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders ("Proxy Statement") is incorporated herein by reference.
Item 11. Executive Compensation
--------------------------------
The information contained under the sections captioned "Compensation
Discussion and Analysis," "Executive Compensation" and "Director 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.
60
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 "Additional Information About Directors and
Executive Officers" 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 "Principal Accounting Fees and Services" 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, 2007 and
2006, 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, 2007, 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.
61
[ROMA FINANCIAL CORPORATION LETTERHEAD]
February 28, 2008
Beard Miller Company LLP
55 US Highway 46 East
PO Box 676
Pine Brook, NJ 07058
RE: Management Report on Internal Control over Financial Reporting
The management of Roma Financial Corp. and Subsidiaries (collectively the
"Company") is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control system is a
process designed to provide reasonable assurance to the management and board of
directors regarding the preparation and fair presentation of published
consolidated financial statements.
Our internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures are
being made only in accordance with authorizations of management and the
directors of the Company; and provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use of disposition of the
Company's assets that could have a material effect on our consolidated financial
statements.
All internal control systems, no matter how well designed, have inherent
limitation. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to consolidated financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of internal control over
financial reporting as of December 31, 2007. In making this assessment, we used
the criteria set for the by The Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework. Based on our
assessment, we believe that, as of December 31, 2007, the Company's internal
control over financial reporting is effective based on those criteria.
The Company's independent registered public accounting firm that audited the
consolidated financial statements has issued an audit report on our assessment
of, and the effective operation of, the Company's internal control over
financial reporting as of December 31, 2007.
/s/ Peter A. Inverso
Peter A. Inverso
President & CEO
/s/ Sharon L. Lamont
Sharon L. Lamont
Chief Financial Officer
[BMC LOGO]
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Roma Financial Corporation
We have audited Roma Financial Corporation's (the "Company") internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management's
Report on Internal Controls. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, Roma Financial Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated statements
of financial condition and the related consolidated statements of income,
changes in stockholders' equity, and cash flows of Roma Financial Corporation
and subsidiaries, and our report dated February 28, 2008, expressed an
unqualified opinion.
/s/Beard Miller Company LLP
Beard Miller Company LLP
Pine Brook, New Jersey
February 28, 2008
[BMC LOGO]
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Roma Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Roma Financial Corporation and subsidiaries (the "Company") as of
December 31, 2007 and 2006, 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, 2007. The Company's management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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 financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Roma
Financial Corporation and subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Roma Financial Corporation's
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 28, 2008, expressed an unqualified opinion.
As discussed in Note 1, the Company changed its method of accounting
for Defined Benefit Pension and Other Postretirement Plans in 2006.
/s/Beard Miller Company LLP
Beard Miller Company LLP
Pine Brook, New Jersey
February 28, 2008
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
December 31,
------------------------------------
2007 2006
--------------- ---------------
(In thousands, except for share data)
Assets
Cash and amounts due from depository institutions $ 6,939 $ 7,219
Interest-bearing deposits in other banks 26,051 26,521
Money market funds 62,312 30,961
--------------- ---------------
Cash and Cash Equivalents 95,302 64,701
Securities available for sale 17,238 19,331
Investment securities held to maturity 127,706 169,927
Mortgage-backed securities held to maturity 144,099 144,480
Loans receivable, net of allowance for loan losses $1,602 and $1,169
respectively 458,873 420,382
Premises and equipment 33,181 30,669
Federal Home Loan Bank of New York stock 2,465 1,432
Interest receivable 4,495 4,598
Bank owned life insurance 18,802 16,185
Other assets 4,953 3,828
--------------- ---------------
Total Assets $907,114 $875,533
=============== ===============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing $ 24,611 $ 25,109
Interest-bearing 626,419 600,863
--------------- ---------------
Total deposits 651,030 625,972
Federal Home Loan Bank of New York advances 28,940 7,863
Advance payments by borrowers for taxes and insurance 2,390 2,275
Other liabilities 5,972 4,769
--------------- ---------------
Total Liabilities 688,332 640,879
--------------- ---------------
Commitments and Contingencies
Minority interest of RomAsia Bank 479 -
--------------- ---------------
Stockholders' Equity
Common stock, $.10 par value, 45,000,000 authorized; 32,731,875
issued; 31,387,919 and 32,731,875, respectively, outstanding. 3,274 3,274
Paid-in capital 97,405 97,069
Retained earnings 148,136 143,068
Unearned shares held by Employee Stock Ownership Plan (7,306) (7,847)
Treasury stock 1,343,956 shares at December 31, 2007 (22,792) -
Accumulated other comprehensive loss (414) (910)
--------------- ---------------
Total Stockholders' Equity 218,303 234,654
--------------- ---------------
Total Liabilities and Stockholders' Equity $907,114 $875,533
=============== ===============
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
F-1
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------------------
2007 2006 2005
(In thousands, except for per share data)
INTEREST INCOME
------------------------------------------------------------------------------------------------------------------------------------
Loans $27,447 $24,748 $20,662
Mortgage-backed securities held to maturity 7,041 7,166 7,158
Investment securities held to maturity 7,730 6,406 5,661
Securities available for sale 626 565 467
Other interest-earning assets 2,925 1,984 684
---------------- ---------------- ---------------
Total Interest Income 45,769 40,869 34,632
---------------- ---------------- ---------------
INTEREST EXPENSE
Deposits 17,320 14,708 10,742
Borrowings 463 482 159
---------------- ---------------- ---------------
Total Interest Expense 17,783 15,190 10,901
---------------- ---------------- ---------------
Net Interest Income 27,986 25,679 23,731
PROVISION FOR LOAN LOSSES 492 291 128
---------------- ---------------- ---------------
Net Interest Income after Provision for Loan Losses 27,494 25,388 23,603
---------------- ---------------- ---------------
NON-INTEREST INCOME
Commissions on sales of title policies 1,292 1,361 1,159
Fees and service charges on deposits and loans 1,308 771 458
Income from bank owned life insurance 778 695 666
Net gain from sale of mortgage loans originated for sale 3 6 14
Other 679 627 619
---------------- ---------------- ---------------
Total Non-Interest Income 4,060 3,460 2,916
---------------- ---------------- ---------------
NON-INTEREST EXPENSES
Salaries and employee benefits 11,899 10,282 8,595
Net occupancy expense of premises 1,850 1,653 1,152
Equipment 1,677 1,483 1,241
Data processing fees 1,329 1,273 1,324
Advertising 881 806 813
Federal insurance premium 74 86 81
Charitable contributions 28 3,527 231
Other 2,589 2,096 1,695
---------------- ---------------- ---------------
Total Non-Interest Expenses 20,327 21,206 15,132
---------------- ---------------- ---------------
Income before Income Taxes and Minority Interest 11,227 7,642 11,387
INCOME TAXES 4,134 2,394 3,852
---------------- ---------------- ---------------
Net income before minority interest 7,093 5,248 7,535
MINORITY INTEREST IN LOSS OF ROMASIA BANK 123 - -
---------------- ---------------- ---------------
Net Income $ 7,216 $ 5,248 $ 7,535
================ ================ ===============
NET INCOME PER COMMON SHARE
Basic and diluted $ .23 $ .19 $ .33
================ ================ ===============
DIVIDENDS DECLARED PER SHARE $ .24 $ - $ -
================ ================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
================ ================ ===============
Basic and diluted 31,563 27,305 22,584
================ ================ ===============
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
F-2
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2007, 2006 and 2005
Retained Unearned Accumulated
Earnings - Shares Other
Common Paid-In Substantially Held Comprehensive Treasury
Stock Capital Restricted by ESOP Income(Loss) Stock Total
----- ------- ---------- ------- ------------ ----- -----
(In Thousands)
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
---------
Comprehensive income:
Net income - - 5,248 - - - 5,248
Unrealized holding loss on securities
available for sale, net of income taxes
of $(72) - - - - (158) - (158)
---------
Total Comprehensive Income 5,090
---------
Initial application of FASB 158,
net of income taxes of $(526) - - - - (790) - (790)
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.
--------------------------------------------------------------------------------
F-3
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Retained Unearned Accumulated
Earnings - Shares Other
Common Paid-In Substantially Held Comprehensive Treasury
Stock Capital Restricted by ESOP Income(Loss) Stock Total
----------------------- ----------------------- ------------- --------- ---------
(In Thousands)
Comprehensive income:
Net income $ - $ - $ 7,216 $ - - $ - $ 7,216
---------
Unrealized holding loss on securities - - - 21 21
available for sale, net of income
taxes of $(56) - -
Application of FASB 158,
net of income taxes of $(316) - - - - 475 - 475
---------
Total Comprehensive Income 7,712
---------
Dividends paid and declared - - (2,148) - - (2,148)
Purchase of treasury stock - - - - - (22,792) (22,792)
ESOP shares earned - 336 - 541 - - 877
------ ------- -------- ------- ----- -------- --------
Balance - December 31, 2007 $3,274 $97,405 $148,136 $(7,306) $(414) $(22,792) $218,303
====== ======= ======== ======= ===== ======== ========
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
F-4
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------------------------------
2007 2006 2005
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,216 $ 5,248 $ 7,535
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of premises and equipment 1,037 1,178 755
Amortization of premiums and accretion of discounts on securities (130) (44) (91)
Accretion of deferred loan fees and discounts (51) 34 (171)
Net gain on sale of mortgage loans originated for sale (3) (6) (14)
Mortgage loans originated for sale (409) (823) (2,718)
Proceeds from sales of mortgage loans originated for sale 412 829 2,732
Provision for loan losses 492 291 128
Deferred income tax expense (benefit) 189 (1,300) 134
Contribution of common stock to charitable foundation - 3,273 -
(Increase) decrease in interest receivable 103 (800) (611)
(Increase) in cash surrender value of bank owned life insurance (617) (545) (526)
(Increase) in other assets (1,341) (297) (1,020)
Increase in interest payable 606 397 716
Increase in other liabilities 477 691 145
Pension cost amortized from accumulated other comprehensive income 81 - -
Net change in minority interest 479 - -
ESOP shares earned 877 414 -
-------------- --------------- ----------------
Net Cash Provided by Operating Activities 9,418 8,540 6,994
-------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from calls and repayments on securities available for sale 2,248 1,264 17
Purchases of securities available for sale (114) (5,338) (2,101)
Proceeds from maturities and calls of investment securities held to maturity 101,272 49,000 10,060
Purchases of investment securities held to maturity (59,235) (45,845) (22,988)
Principal repayments on mortgage-backed securities held to maturity 28,309 25,453 31,207
Purchases of mortgage-backed securities held to maturity (27,621) (19,791) (42,936)
Net increase in loans receivable (38,932) (41,999) (43,415)
Additions to premises and equipment (3,549) (3,168) (8,879)
(Purchase) redemption of Federal Home Loan Bank of New York stock (1,033) (45) 2,652
Purchase of bank owned life insurance (2,000) - -
-------------- --------------- ----------------
Net Cash Used in Investing Activities (655) (40,469) (76,383)
-------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 25,058 (17,841) 67,513
Increase in advance payments by borrowers for taxes and insurance 115 212 519
Federal Home Loan Bank of New York advances 23,000 - 10,000
Repayments of Federal Home Loan Bank of New York advances (1,923) (1,839) (298)
Purchase of treasury stock (22,792) - -
Dividend paid to minority shareholders of Roma Financial Corp (1,620) - -
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 21,838 68,541 77,534
-------------- --------------- ----------------
Net Increase in Cash and Cash Equivalents 30,601 36,612 8,145
CASH AND CASH EQUIVALENTS - BEGINNING 64,701 28,089 19,944
-------------- --------------- ----------------
CASH AND CASH EQUIVALENTS - ENDING 95,302 $64,701 $28,089
============== =============== ================
SUPPLEMENTARY CASH FLOWS INFORMATION
Income taxes paid, net $ 4,633 $ 2,948 $ 4,271
============== =============== ================
Interest paid $17,177 $14,786 $ 10,185
============== =============== ================
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
F-5
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
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."). The consolidation also includes the Company's majority
owned subsidiary, RomAsia Bank (in organization). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
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. RomAsia Bank is in
organization and has an application pending with the Office of Thrift
Supervision to be a federal savings bank. The Company has advanced $903,000
as organizational capital and intends to maintain a 60% ownership interest
of RomAsia Bank upon completion of the organization. As presently
contemplated, RomAsia Bank will need to raise $15.0 million in initial
capital, including the investment made by the Company.
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.
--------------------------------------------------------------------------------
F-6
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
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.
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,
--------------------------------------------------------------------------------
F-7
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
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 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.
--------------------------------------------------------------------------------
F-8
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company and it subsidiaries, except for RomAsia which files a separate
federal return, 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.
Federal and state income taxes have been provided on the basis of reported
income or loss. 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.
The tax effect of these temporary differences is accounted for as deferred
taxes applicable to future periods. Deferred income tax expense or benefit
is determined by recognizing deferred tax assets and liabilities for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment
date. The realization of deferred tax assets is assessed and a valuation
allowance provided for the full amount which is not more likely than not to
be realized.
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 related to defined benefit
pension liabilities in accordance with 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. At December 31, 2007 and
2006, the Bank had deposits totaling $88.4 million and $57.4 million,
--------------------------------------------------------------------------------
F-9
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
which were held by the Federal Home Loan Bank of New York and another
financial institution which are not insured by the FDIC.
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. The adoption of FIN 48 did not
have a material impact on The company's consolidated financial position,
results of operation or cash flows.
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 measurement
date, the date at which the benefit obligation and plan assets are
measured, is required to be the Company's fiscal year end. SFAS No. 158 is
effective for publicly-held companies for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are
effective for fiscal years ending after December 31, 2008. Accordingly,
FASB 158 adjustments are reflected in these financial statements.
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
--------------------------------------------------------------------------------
F-10
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
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.
In March 2007, the FASB ratified EITF Issue No. 06-11, "Accounting for
Income Tax benefits of Dividends on Share-Based Payment Awards." EITF 06-11
requires companies to recognize the income tax benefit realized from
dividends or dividend equivalents that are charged to retained earnings and
paid to employees for nonvested equity-classified employee share-based
payment awards as an increase to additional paid-in capital. EITF 06-11 is
effective for fiscal years beginning after September 15, 2007. The Company
does not expect EITF 06-11 will have a material impact on its financial
position, results of operations or cash flows.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements" (EITF 06-10). EITF 06-10 provides guidance for determining a
liability for the postretirement benefit obligation as well as recognition
and measurement of the associated asset on the basis of the terms of the
collateral assignment agreement. EITF 06-10 is effective for fiscal years
beginning after December 15, 2007. The Company is currently assessing the
impact of EITF 06-10 on its consolidated financial position and results of
operations.
On September 7, 2006 , the Task Force reached a conclusion on EITF Issue
No. 06-5, "Accounting for Purchases of Life Insurance - Determining the
Amount That Could Be Realized in Accordance with FASB Technical Bulletin
No. 85-4, Accounting for Purchases of Life Insurance ("EITF 06-5"). The
scope of EITF 06-5 consists of six separate issues relating to accounting
for life insurance policies purchased by entities protecting against the
loss of "key persons." The six issues are clarifications of previously
issued guidance on FASB Technical Bulletin No. 85-4. EITF 06-5 is effective
for fiscal years beginning after December 15, 2006. The adoption of EITF
Issue No. 06-05 did not have a material effect on the consolidated
financial statements.
In May 2007, the FASB issued FASB FSP FIN 48-1 "Definition of Settlement in
FASB Interpretation No. 48". FSP FIN 48-1 provides guidance on how to
determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. FSP FIN 48-1 in effective
retroactive to January 1, 2007. The adoption of FSB FUB 48-1 did not have a
material impact on the consolidated financial position, results of
operations or cash flows.
FASB statement No. 141 (R) "Business Combinations" was issued in December
of 2007. This Statement establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. The Statement also provides
guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial
effects of the business combination. The guidance will become effective as
of the beginning of a company's fiscal year beginning after December 15,
2008. This new pronouncement will impact the Company's accounting for
business combinations completed beginning January 1, 2009.
FASB statement No. 160 "Noncontrolling Interests in Consolidated Financial
Statements--an amendment of ARB No. 51" was issued in December of 2007.
This Statement establishes accounting and reporting standards
--------------------------------------------------------------------------------
F-11
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. The guidance will become effective as of the beginning of
a company's fiscal year beginning after December 15, 2008. The Company is
currently evaluating the potential impact the new pronouncement will have
on its consolidated financial statements.
Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6
of Section D.2 of Topic 14, "Share-Based Payment," of the Staff Accounting
Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views
of the staff regarding the use of the "simplified" method in developing an
estimate of expected term of "plain vanilla" share options and allows usage
of the "simplified" method for share option grants prior to December 31,
2007. SAB 110 allows public companies which do not have historically
sufficient experience to provide a reasonable estimate to continue use of
the "simplified" method for estimating the expected term of "plain vanilla"
share option grants after December 31, 2007. SAB 110 is effective January
1, 2008.
Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments
Recorded at Fair Value Through Earnings" expresses the views of the staff
regarding written loan commitments that are accounted for at fair value
through earnings under generally accepted accounting principles. To make
the staff's views consistent with current authoritative accounting
guidance, the SAB revises and rescinds portions of SAB No. 105,
"Application of Accounting Principles to Loan Commitments." Specifically,
the SAB revises the SEC staff's views on incorporating expected net future
cash flows related to loan servicing activities in the fair value
measurement of a written loan commitment. The SAB retains the staff's views
on incorporating expected net future cash flows related to
internally-developed intangible assets in the fair value measurement of a
written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan
commitments issued or modified in fiscal quarters beginning after December
15, 2007. The Company does not expect SAB 109 to have a material impact on
its financial statements.
In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b,
"Effective Date of FASB Statement No. 157," that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items)
that are not recognized or disclosed at fair value in an entity's financial
statements on a recurring basis (at least annually). Therefore, if the
change in fair value of a non-financial item is not required to be
recognized or disclosed in the financial statements on an annual basis or
more frequently, the effective date of application of Statement 157 to that
item is deferred until fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. This deferral does not apply,
however, to an entity that applies Statement 157 in interim or annual
financial statements before proposed FSP 157-b is finalized. The Company is
currently evaluating the impact, if any, that the adoption of FSP 157-b
will have on the Company's operating income or net earnings.
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 did not differ 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
--------------------------------------------------------------------------------
F-12
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
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.
Reclassification
Certain amounts as of and for the years ended December 31, 2006 and 2005 have
been reclassified to conform with the current year's presentation.
Note 2 - Securities Available for Sale
December 31, 2007
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
--------------- ---------------- ---------------- ---------------
(In Thousands)
Mortgage-backed securities $ 1,260 $ 32 $ - $ 1,292
--------------- ---------------- ---------------- ---------------
Obligations of state and political subdivisions:
After one year through five years 799 5 - 804
After five years through ten years 5,291 68 - 5,359
After ten years 3,930 35 - 3,965
--------------- ---------------- ---------------- ---------------
10,020 108 - 10,128
--------------- ---------------- ---------------- ---------------
Equity securities 3,630 16 203 3,443
Mutual fund shares 2,483 - 108 2,375
--------------- ---------------- ---------------- ---------------
$17,393 $156 $311 $17,238
=============== ================ ================ ===============
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 2,000 - 21 1,979
one year through five years
Equity securities 3,630 39 222 3,447
Mutual fund shares 2,368 - 142 2,226
--------------- ---------------- ---------------- ---------------
$19,520 $196 $385 $19,331
=============== ================ ================ ===============
--------------------------------------------------------------------------------
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, 2007:
Equity securities $ - $ - $3,377 $203 $3,377 $203
Mutual funds - - 2,375 108 2,375 108
-------------- -------------- -------------- -------------- -------------- --------------
$ - $ - $5,752 $311 $5,752 $311
============== ============== ============== ============== ============== ==============
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
============== ============== ============== ============== ============== ==============
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 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, 2007,
there was one mutual fund, and one equity security in unrealized loss positions
compared to one mutual fund, one equity and one U.S. Government security in an
unrealized loss position at the prior year end.
There were no sales of securities available for sale during the years ended
December 31, 2007, 2006, and 2005.
F-14
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 3 - Investment Securities Held to Maturity
December 31, 2007
-------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
--------------- ---------------- ---------------- ---------------
(In Thousands)
U.S. Government (including agencies):
Within one year $ 18,000 $ 4 $ 52 $ 17,952
After one year through five years 43,313 43 25 43,331
After five years through ten years 49,975 114 9 50,080
After ten years 11,995 60 - 12,055
--------------- ---------------- ---------------- ---------------
123,283 221 86 123,418
--------------- ---------------- ---------------- ---------------
Obligations of state and political subdivisions:
After one year through five years 1,265 55 - 1,320
After ten years 3,158 6 74 3,090
--------------- ---------------- ---------------- ---------------
4,423 61 74 4,410
--------------- ---------------- ---------------- ---------------
$127,706 $282 $160 $127,828
=============== ================ ================ ===============
December 31, 2006
-------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair 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
=============== ================ ================ ===============
F-15
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 3 - Investment Securities Held to Maturity (Continued)
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:
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, 2007:
U.S. Government
(including agencies):
Within one year $ - $ - $13,948 $52 $13,948 $ 52
After one year
through five years 825 - 15,975 25 16,800 25
After five years
through ten years 3,987 9 - - 3,987 9
------------- ------------- -------------- -------------- ------------- -------------
4,812 9 29,923 77 34,735 86
Obligations of state and
political subdivisions:
Over ten years 2,304 74 - - 2,304 74
------------- ------------- -------------- -------------- ------------- -------------
$7,116 $83 $29,923 $77 $37,039 $160
============= ============= ============== ============== ============= =============
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
============= ============= ============== ============== ============= =============
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, 2007, there were 27 U.S. Government agencies and four
obligations of state and political subdivisions in unrealized loss positions
compared to 130 and 2, respectively, in unrealized loss positions as of December
31, 2006.
There were no sales of investment securities held to maturity during the years
ended December 31, 2007, 2006, and 2005.
At December 31, 2007 and 2006, approximately $83.3 million and $52.6 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, 2007
-------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
--------------- ---------------- ---------------- ---------------
(In Thousands)
Government National Mortgage Association $ 4,276 $ 39 $ 2 $ 4,313
Federal Home Loan Mortgage Corporation 84,648 579 457 84,770
Federal National Mortgage Association 47,387 451 215 47,623
Collateralized mortgage obligations 7,788 58 112 7,734
--------------- ---------------- ---------------- ---------------
$144,099 $1,127 $786 $144,440
=============== ================ ================ ===============
December 31, 2006
-------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
--------------- ---------------- ---------------- ---------------
(In Thousands)
Government National Mortgage Association $ 5,630 $ 33 $ 52 $ 5,611
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 $2,275 $142,758
=============== ================ ================ ===============
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, 2007:
Government National
Mortgage
Association $ 772 $ 1 $ 165 $ 1 $ 937 $ 2
Federal Home Loan
Mortgage
Corporation 4,921 51 28,711 406 33,632 457
Federal National
Mortgage
Association 6,238 7 17,769 208 24,007 215
Collateralized mortgage
obligations - - 2,740 112 2,740 112
-------------- -------------- -------------- -------------- -------------- --------------
$11,931 $59 $49,385 $727 $61,316 $786
============== ============== ============== ============== ============== ==============
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, 2006:
Government National
Mortgage
Association $ - $ - $ 3,370 $ 52 $ 3,370 $ 52
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 $2,275
============== ============== ============== ============== ============== ==============
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, 2007, there were 9 Government National Mortgage
Association, 48 Federal Home Loan Mortgage Corporation, 30 Federal National
Mortgage Association, and 6 Collateralized mortgage obligations, in unrealized
loss positions compared to 23, 76, 49, and 6, respectively, in unrealized loss
positions as of December 31, 2006.
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 2007, 2006, and 2005.
At December 31, 2007 and 2006, mortgage-backed securities held to maturity with
a carrying value of approximately $918,000 and $1,126,000, 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,
-----------------------------------
2007 2006
---------------- ---------------
(In Thousands)
Real estate mortgage loans:
Conventional 1-4 family $219,900 $207,755
Commercial and multi-family 80,537 65,848
---------------- ---------------
300,437 273,603
---------------- ---------------
Construction 37,119 23,956
---------------- ---------------
Consumer:
Personal - -
Passbook or certificate 1,103 1,314
Automobile 24 33
Equity and second mortgages 130,085 127,450
---------------- ---------------
131,212 128,797
---------------- ---------------
Commercial 3,918 3,724
---------------- ---------------
Total Loans 472,686 430,080
---------------- ---------------
Less:
Allowance for loan losses 1,602 1,169
Deferred loan fees and discounts 174 176
Loans in process 12,037 8,353
---------------- ---------------
13,813 9,698
---------------- ---------------
$458,873 $420,382
================ ===============
At December 31, 2007, 2006 and 2005, loans serviced for the benefit of others
totaled approximately $7,291,000, $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 $8.5 million
has been sold as of December 31, 2007. 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 2007, 2006
and 2005, the Bank recognized approximately $18,000, $17,000, and $13,000,
respectively, of servicing fee income.
At December 31, 2007, 2006 and 2005, nonaccrual loans for which the accrual of
interest has been discontinued totaled approximately $6,889,000, $363,000, and
$654,000, respectively. Interest income on such loans is recognized only when
actually collected. During the years ended December 31, 2007, 2006 and 2005, the
Bank recognized interest income of approximately $370,000, $12,000, and $40,000,
respectively, on these loans. Interest income that would have been recorded had
the loans been on the accrual status, would have amounted to approximately
$670,000, $22,000, and $47,000 for the years ended December 31, 2007, 2006 and
2005, 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,
-----------------------------------
2007 2006
---------------- ---------------
(In Thousands)
Recorded investment in impaired loans with recorded allowances $6,098 $ 41
Related allowance for loan losses (178) (6)
---------------- ---------------
$5,920 $ 35
================ ===============
For the years ended December 31, 2007, 2006 and 2005, the average recorded
investment in impaired loans totaled approximately $3,042,000, $64,000, and
$73,000, respectively. Interest income of approximately $63,000, $8,000, and
$13,000, 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,
------------------------------------------------------
2007 2006 2005
---------------- ---------------- ---------------
(In Thousands)
Balance - beginning $1,169 $878 $750
Provisions charged to operations 492 291 128
Losses charged to allowance (59) - -
---------------- ---------------- ---------------
Balance - ending $1,602 $1,169 $878
================ ================ ===============
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, 2007 and 2006 was
approximately $838,000 and $727,000, respectively. During the year ended
December 31, 2007, there was one new loan to a related party of $145,000 and
repayments totaled $33,656.
F-20
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 6 - Premises and Equipment
December 31,
-----------------------------------
2007 2006
---------------- ---------------
(In Thousands)
Land held for future development $ 1,054 $ 1,054
---------------- ---------------
Construction in progress, including land of $503 1,772 2,598
---------------- ---------------
Land and land improvements 5,428 5,428
---------------- ---------------
Buildings and improvements 26,391 22,611
Accumulated depreciation (4,400) (3,775)
---------------- ---------------
21,991 18,836
---------------- ---------------
Furnishings and equipment 7,531 6,936
Accumulated depreciation (4,595) (4,183)
---------------- ---------------
2,936 2,753
---------------- ---------------
$33,181 $30,669
================ ===============
Note 7 - Interest Receivable
December 31,
-----------------------------------
2007 2006
---------------- ---------------
(In Thousands)
Loans receivable $2,166 $1,927
Investment securities held to maturity 1,377 1,734
Mortgage-backed securities held to maturity 716 693
Securities available for sale 130 192
Other interest-earning assets 106 52
---------------- ---------------
$4,495 $4,598
================ ===============
F-21
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 8 - Deposits
December 31,
--------------------------------------------------------------------------
2007 2006
------------------------------------ ------------------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
--------------- ---------------- ---------------- ---------------
(Dollars In Thousands)
Demand:
Non-interest bearing checking $ 24,611 0.00% $ 25,109 0.00%
Interest bearing checking 98,481 0.54% 98,278 0.53%
--------------- ----------------
123,092 0.43% 123,387 0.42%
Savings and club 175,972 0.96% 185,925 0.93%
Certificates of deposit 351,966 4.59% 316,660 4.30%
--------------- ----------------
$651,030 2.82% $625,972 2.53%
=============== ================
Certificates of deposit with balances of more than $100,000 totaled
approximately $89,637,000 and $74,134,000 at December 31, 2007 and 2006,
respectively. Deposits in excess of $100,000 are not insured by the Federal
Deposit Insurance Corporation.
December 31,
-----------------------------------
2007 2006
---------------- ---------------
(In Thousands)
Maturing in:
One year or less $269,642 $237,814
After one to two years 43,244 32,923
After two to three years 31,909 16,984
After three to four years 5,986 23,715
After four to five years 1,162 5,094
After five years 23 130
---------------- ---------------
$351,966 $316,660
================ ===============
Interest expense on deposits consists of the following:
Years Ended December 31,
------------------------------------------------------
2007 2006 2005
---------------- ---------------- ---------------
(In Thousands)
Demand $ 515 $ 512 $ 477
Savings and club 1,691 1,717 1,987
Certificates of deposit 15,114 12,479 8,278
---------------- ---------------- ---------------
$17,320 $14,708 $10,742
================ ================ ===============
F-22
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 9 - Federal Home Loan Bank ("FHLB") Advances
At December 31, 2007 and 2006, the Bank had an outstanding long-term FHLB
advance totaling $5.9 million and $7.9 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,
2008 $2,011
2009 2,087
2010 1,842
----------------
$5,940
================
At December 31, 2007, the Bank also had an outstanding FHLB advance totaling
$23.0 million. The borrowing is at a fixed rate of 3.90% for ten years, maturing
in 2017, callable at three years. Interest is paid quarterly.
At December 31, 2007 and 2006 the advances were secured by pledges of the Bank's
investment in the capital stock of the FHLB totaling $2,465,000 and $1,432,000,
respectively, and a specific pledge of investment securities held to maturity
with a par value totaling $28 million and $26 million, respectively.
At December 31, 2007 and 2006, the Bank also had available to it $84,443,900 and
$79,667,700, respectively, under a revolving line of credit and an additional
$84,443,900 and $79,667,700, respectively, under a Companion (DRA) Commitment,
both expiring July 31, 2008 and July 31, 2007, 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, 2007 and 2006.
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,
-----------------------------------
2007 2006
---------------- ---------------
(In Thousands)
GAAP capital $179,406 $184,692
Goodwill (572) (572)
FAS 158 adjustment 315 -
Unrealized (gain) loss on securities available for sale (28) 120
---------------- ---------------
Core and tangible capital 179,121 184,240
General valuation allowance 1,597 1,169
---------------- ---------------
Total Regulatory Capital $180,718 $185,409
================ ===============
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, 2007:
Total capital (to risk-weighted
assets) $180,718 33.92% =>$42,620 =>8.00% $53,275 =>10.00
Tier 1 capital (to risk-weighted
assets) 179,121 33.62 31,915 => 6.00
Core (Tier 1) capital (to adjusted
total assets) 179,121 20.46 =>26,259 =>3.00 43,765 => 5.00
Tangible capital (to adjusted total
assets) 179,121 20.46 =>13,129 =>1.50 => => -
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 April 25, 2007, the most recent notification from the Office of Thrift
Supervision, the Bank, based on its actual capital amounts at December 31, 2006,
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,
-----------------------------------
2007 2006
---------------- ---------------
(In Thousands)
Change in Benefit Obligation
Benefit obligation - beginning $ 8,095 $ 7,795
Service cost 340 345
Interest cost 487 450
Actuarial (gain) loss (327) (220)
Benefits paid (273) (262)
Settlements (13) (13)
---------------- ---------------
Benefit obligation - ending 8,309 8,095
---------------- ---------------
Change in Plan Assets
Fair value of assets - beginning 7,582 7,022
Actual gain on plan assets 1,024 583
Employer contributions 291 252
Benefits paid (273) (262)
Settlements (13) (13)
---------------- ---------------
Fair value of assets - ending 8,611 7,582
---------------- ---------------
Funded status $ 302 $ (513)
================ ===============
Discount rate 6.13% 6.13%
Long-term rate 8.50% 8.50%
Salary increase rate 4.00% 4.00%
At December 31, 2007, and 2006 unrecognized net loss of $449,000and
$1,196,000, respectively, and unrecognized prior service liability of
$77,000 and $ 120,000, respectively, were included in accumulated other
comprehensive income in accordance with SFAS No. 158. Approximately $38,000
and $15,000 of these balances are expected to be recognized in pension
expense during the year ended December 31, 2008.
F-25
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 11 - Benefit Plans (Continued)
Pension Plan (Continued)
Years Ended December 31,
------------------------------------------------------
2007 2006 2005
---------------- ---------------- ---------------
(In Thousands)
Net periodic pension expense
Service cost $ 340 $345 $282
Interest cost 487 450 412
Expected return on assets (642) (596) (511)
Amortization of:
Unrecognized transition obligation - - 23
Unrecognized prior service liability 38 60 60
Unrecognized loss 43 67 30
---------------- ---------------- ---------------
Total pension expense $266 $326 $296
================ ================ ===============
Discount rate 6.13% 5.88% 5.88%
Salary increase rate 4.00% 4.00% 3.50%
Plan Asset Allocations
The Bank's pension plan weighted-average asset allocations, by asset
category, are as follows:
October 1,
-----------------------------------
2007 2006
---------------- ---------------
Equity securities 70 % 73 %
Debt securities (Bond Mutual Funds) 30 27
---------------- ---------------
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 7% to 11%.
Contributions
For the fiscal year ending December 31, 2008, the Bank expects to
contribute approximately $402,000 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):
2008 $ 439
2009 533
2010 548
2011 551
2012 558
2013 - 2017 3,162
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 $140,000, $120,000, and $116,000 during the years ended
December 31, 2007, 2006 and 2005, 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 $2,140,000 and $1,761,000 as of December 31, 2007 and
2006, respectively, towards this liability. Expense recorded for the plans
totaled approximately $384,000, $437,000, and $447,000 during the years
ended December 31, 2007, 2006 and 2005, respectively. During the years
ended December 31, 2007, 2006 and 2005 payments were paid to beneficiaries
and to individuals who terminated their employment in the amounts of
$5,000, $34,000, and $16,000, 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 in 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 years ended December 31,
2007 and 2006 was approximately $877,000 and $414,000. The status of
Company shares in the ESOP at December 31, 2007 and 2006 is as follows:
2007 2006
------------------ ------------------
Allocated shares 27,058 -
Shares committed to be released 54,116 27,058
Unearned shares 730,576 784,692
------------------ ------------------
Total ESOP Shares 811,750 811,750
================== ==================
Fair value of unearned shares $11,462,737 $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, 2007 and 2006, 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,
------------------------------------------------------
2007 2006 2005
---------------- ---------------- ---------------
(In Thousands)
Current tax expense:
Federal income $3,293 $3,126 $3,274
State income 652 568 444
---------------- ---------------- ---------------
3,945 3,694 3,718
---------------- ---------------- ---------------
Deferred tax expense (benefit):
Federal income 211 (1,100) 96
State income (124) (301) 38
---------------- ---------------- ---------------
87 (1,401) 134
---------------- ---------------- ---------------
Valuation allowance 102 101 -
---------------- ---------------- ---------------
$4,134 $2,394 $3,852
================ ================ ===============
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,
------------------------------------------------------
2007 2006 2005
---------------- ---------------- ---------------
(In Thousands)
Federal income tax $3,929 $2,675 $3,985
Increases (reductions) in taxes resulting from:
New Jersey income tax, net of federal income
tax effect 348 176 313
Tax exempt interest on obligations of state and
political subdivisions (172) (164) (162)
Bank owned life insurance (210) (191) (179)
Surtax exemption (100) (100) (100)
Other items, net 237 (103) (5)
---------------- ---------------- ---------------
4,031 2,293 3,852
Valuation allowance 102 101 -
---------------- ---------------- ---------------
Total income tax expense $4,134 $2,394 $3,852
================ ================ ===============
Effective income tax rate 36.8% 31.3% 33.8%
================ ================ ===============
F-29
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 12 - Income Taxes (Continued)
The Company established a valuation allowance for the state income taxes for the
benefit to be derived from the utilization of the state net operating loss carry
forward for Roma Bank and for a contribution carry forward for Roma Financial
Corporation.
The tax effects of existing temporary differences that give rise to deferred
income tax assets and liabilities are as follows:
December 31,
-----------------------------------
2007 2006
---------------- ---------------
(In Thousands)
Deferred loan fees $ 22 $ 29
Allowance for loss on loans and other reserves 641 451
Uncollected interest and late fees 132 21
Retirement benefits 856 697
Accumulated other comprehensive income-Pension 210 526
Charitable contributions 664 1,066
ESOP 149 53
Unrealized loss on securities available for sale 56 69
Other items - 21
Net operating loss 102
---------------- ---------------
2,629 2,933
Valuation allowance (203) (101)
---------------- ---------------
Total Deferred Tax Assets 2,629 2,832
---------------- ---------------
Goodwill and other items (42) (26)
Pension expense (331) (318)
Depreciation (759) (490)
Capitalized interest (171) (163)
Other (9) -
---------------- ---------------
Total Deferred Tax Liabilities (1,312) (997)
---------------- ---------------
Net Deferred Tax Assets (Liabilities) $1,317 $1,835
================ ===============
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.
F-30
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 13 - Commitments and Contingencies (Continued)
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 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,
-------------------------------------------------------------------------------
2007 2006
------------------------------------- -------------------------------------
Rate Range Amount Rate Range Amount
----------------- ---------------- -------------- ------------------
(Dollars In Thousands)
Mortgage loans:
Fixed rate 6.125% to 6.375% $656 5.875% to 6.875% $1,888
Adjustable rate - - 5.75% to 9.25% 720
Equity loans:
Fixed rate 5.99% to 7.25% 3,706 5.875% to 7.375% 2,590
Floating rate 5.99% to 8.25% 389
---------------- ------------------
$4,362 $5,587
================ ==================
At December 31, 2007 and 2006, undisbursed funds from approved lines of credit
under a homeowners' equity lending program amounted to approximately $33,087,000
and $31,524,000, 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, 2007 and 2006, undisbursed funds from approved commercial lines of credit,
both secured and unsecured, amounted to approximately $25,214,000 and
$12,529,000, 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.
F-31
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 13 - Commitments and Contingencies (Continued)
The Bank has non-cancelable operating leases for branch offices. The following
is a schedule by years of future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year at December 31, 2007:
Years Ended December 31:
2008 $ 183,619
2009 185,091
2010 186,593
2011 188,124
2012 191,887
Thereafter 2,570,826
-----------------
Total Minimum Payments Required $3,506,140
=================
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, 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. 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. As of December 31, 2007 a new contract had not yet been signed.
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
F-32
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 14 - Fair Value of Financial Instruments (Continued)
Securities (Continued)
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.
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.
F-33
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 14 - Fair Value of Financial Instruments (Continued)
Loan Commitments
The carrying amounts and estimated fair values of financial instruments are as
follows:
December 31,
------------------------------------------------------------------
2007 2006
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
(In Thousands)
Financial assets:
Cash and cash equivalents $95,302 95,302 $64,701 $64,701
Securities available for sale
17,238 17,238 19,331 19,331
Investment securities held to maturity 127,706 127,828 169,927 167,934
Mortgage-backed securities held to
maturity 144,099 144,440 144,480 142,758
Loans receivable 458,873 461,735 420,382 418,846
Interest receivable 4,495 4,495 4,598 4,598
Financial liabilities:
Deposits 651,030 650,535 625,972 624,752
Federal Home Loan Bank of New York
Advances 28,940 28,795 7,863 7,654
Accrued interest payable $ 1,853 $ 1,853 $ 1,247 $ 1,247
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 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.
F-34
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 15 - Stockholders' Equity
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.
On August 10, 2007, the Company announced that its Board of Directors authorized
a stock repurchase program to repurchase up to 10% of its outstanding shares
(excluding Roma Financial Corp., MHC, the Company's mutual holding company) or
up to 981,956 shares. This repurchase was completed on August 27, 2007 with
981,956 shares purchased for $16,700,000 at an average cost of $16.96 per share.
On October 24, 2007, the Company announced that the Board of Directors
authorized an additional stock repurchase plan to acquire up to 441,880 shares
of 5% of the Company's outstanding stock help by persons other than Roma
Financial, MHC. During the year ended December 31, 2007 the Company purchased in
the open market 362,000 of these shares for $6,092,000 at an average cost of
$16.83 per share.
F-35
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 16 - Accumulated Other Comprehensive Income
The components of accumulated other comprehensive (loss) included in
stockholders' equity are as follows:
Year Ended December 31,
--------------------------
2007 2006
--------- ---------
Net unrealized (loss) on securities
available for sale $ (155) $ (189)
Tax effect 56 69
--------- ---------
Net of tax amount (99) (120)
--------- ---------
Pension amounts under SFAS No. 158 525 1,316
Tax effect 210 526
--------- ---------
Net of tax amount (315) (790)
--------- ---------
Accumulated other comprehensive (loss) $ (414) $ (910)
========= =========
The components of other comprehensive income and their related tax effects are
presented in the following table:
Years Ended December 31,
------------------------------------
2007 2006 2005
------ ------ ------
(In thousands)
Unrealized holding gains (losses available for sale:
Unrealized holding (losses) arising during the year $ 77 $ (230) $ (119)
Reclassification adjustment for gains included in
net income - - -
Net unrealized losses on securities available for sale 77 (230) (119)
------ ------ ------
Defined benefit pension plan:
Pension losses 748 - -
Prior service cost 43 - -
Settlement accounting - - -
Net change in defined benefit pension plan
accrued expense 791 - -
------ ------ ------
Other comprehensive income before taxes 868 (230) (119)
Tax effect (372) (72 (49
------ ------ ------
Other comprehensive income (loss) $ 496 $ (158) $ (70)
====== ====== ======
F-36
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 17 - Retained Earnings
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 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 regulation, (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 year, 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.
The Company declared $2.1 million in dividends in 2007 to the minority
shareholders of Roma Financial Corporation. The Company requested of, and was
permitted by the OTS to waive dividends on the shares held by the MHC. Total
dividends waived during the year ended December 31, 2007 were $5.8 million.
Note 18 - Parent Only Financial Information
The Company operates its majority-owned subsidiary, RomAsia Bank, 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, 2007, and 2006 and for the periods
ended December 31, 2007, 2006 and 2005.
F-37
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 18 - Parent Only Financial Information (Continued)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
----------------------------------------
2007 2006
------------------- -------------------
(In Thousands)
Assets
Cash and amounts due from depository institutions $ 13,466 $ 32,674
Investment in subsidiaries 180,099 184,612
Securities available for sale 3,425 3,390
Securities held to maturity 10,999 4,999
Mortgage backed securities held to maturity 1,708 -
ESOP loan receivable 7,677 7,976
Premises and equipment 355 -
Other assets 1,102 1,041
------------------- -------------------
$218,831 $234,692
=================== ===================
Liabilities and Stockholders' Equity
Other Liabilities $ 528 $ 38
Stockholders' equity 218,303 234,654
------------------- -------------------
$218,831 $234,692
=================== ===================
CONDENSED STATEMENTS OF INCOME
From
Year Ended Year Ended to Inception
December 31, December 31, December 31,
2007 2006 2005
------------------------------------------------------
(In Thousands)
Interest income $2,346 $1,288 $ -
Equity in undistributed earnings of the subsidiaries 5,948 6,531 7,535
------------------ ---------------- -----------------
8,294 7,819 7,535
Other expenses 227 3,461 -
------------------ ---------------- -----------------
Income before income tax 8,067 4,358 7,535
Income tax (benefit) 851 (890) -
------------------ ---------------- -----------------
Net Income $7,216 $5,248 $7,535
==================================== =================
F-38
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 18 - Parent Only Financial Information (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
From
Year Ended Year Ended Inception
December 31, December 31, to December 31,
2007 2006 2005
----------------------------------------------------------
(In Thousands)
Cash Flows from Operating Activities
Net income $7,216 $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 (5,948) (6,531) (7,535)
(Increase) decrease in other assets (7) (1,689) -
Increase (decrease) in other liabilities (38) 38 -
------------------- ----------------- --------------
Net Cash Provided by (used in) Operating Activities 1,223 (2,934) -
------------------- ----------------- --------------
Cash Flows Provided by Investing Activities
Loan to ESOP - (8,117) -
Repayment of loan to ESOP 299 141 -
Purchase of
Available for sale securities - (3,580) -
Held to maturity securities (6,000) (4,999) -
Mortgage backed securities held to maturity (1,708) - -
Additions to premises and equipment (355) - -
------------------- ----------------- --------------
Net Cash Provided by (used in) Investing (7,764) (16,555) -
Activities
--------------
Cash Flows Provided by (Used in) Financing Activities
Distribution from (contribution to) subsidiary 12,000 (48,035) -
Additional contribution to subsidiary (255) - -
Purchase of treasury stock (22,792) - -
Dividends paid to minority shareholders (1,620) - -
Issuance of common stock - 99,398 800
------------------- ----------------- --------------
Net Cash Provided by (used in) Financing
Activities (12,667) 51,363 800
------------------- ----------------- --------------
Net Increase (Decrease) in Cash and Cash (19,208) 31,874 800
Equivalents
Cash and Cash Equivalents - Beginning 32,674 800 -
------------------- ----------------- --------------
Cash and Cash Equivalents - Ending $13,466 $32,674 $ 800
=================== ================ ==============
F-39
Roma Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 19 - Quarterly Financial Data (Unaudited)
Year Ended December 31, 2007
-------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ---------------- ---------------- ---------------
(In Thousands)
Interest income $11,151 $11,407 $11,614 $11,597
Interest expense 4,162 4,313 4,452 4,856
--------------- ---------------- ---------------- ---------------
Net Interest Income 6,989 7,094 7,162 6,741
Provision for loan losses 158 68 141 125
--------------- ---------------- ---------------- ---------------
Net Interest Income after Provision for
Loan Losses 6,831 7,026 7,021 6,616
Non-interest income 891 1,047 932 1,190
Non-interest expenses 4,918 5,195 4,964 5,250
--------------- ---------------- ---------------- ---------------
Income before Income Taxes and Minority
Interest 2,804 2,878 2,989 2,556
Income taxes 985 1,017 1,125 1,007
--------------- ---------------- ---------------- ---------------
Net Income before Minority Interest 1,819 1,861 1,864 1,549
Loss allocable to minority interest - 68 20 35
--------------- ---------------- ---------------- ---------------
Net Income $1,819 $1,929 $1,884 $1,584
=============== ================ ================ ===============
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
=============== ================ ================ ===============
F-40
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 13, 2008.
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 13, 2008 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)