Rome Bancorp 10-K 2007
Documents found in this filing:
U.S. SECURITIES AND EXCHANGE COMMISSION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the fiscal
year ended December 31, 2006
ROME BANCORP, INC.
100 W. Dominick Street, Rome, New
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark of the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
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 o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (Sect. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants 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.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes o No x
Based on the closing sales price on June 30, 2006, the aggregate market value of the voting stock held by non-affiliates of the registrant was $89,482,000.
Rome Bancorp had 8,471,983 shares of common stock outstanding as of March 9, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A to be issued by the Corporation in connection with the 2007 Annual Meeting and portions of the 2006 Annual Report to Shareholders for the fiscal year ended December 31, 2006 are incorporated by reference into Parts II and III of this report.
TABLE OF CONTENTS
Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements which may be identified by the use of such words as believe, expect, anticipate, should, planned, estimated, and potential. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition and results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates including, but not limited to, changes in the real estate market or local economy, changes in interest rates, changes in laws and regulations to which we are subject, and competition in our primary market area.
Any or all of our forward-looking statements in this Annual Report on Form 10-K and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or unknown risks and uncertainties. Consequently, no forward-looking statements can be guaranteed. We disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.
Rome Bancorp, Inc. (Rome Bancorp or the Company) is a Delaware corporation organized on June 9, 1999 as the stock holding company for The Rome Savings Bank (Rome Savings or the Bank), a federally chartered stock savings bank headquartered in Rome, New York. Rome Bancorps principal business is to hold the capital stock of Rome Savings.
The Rome Savings Bank is a federal stock savings bank and the wholly-owned subsidiary of Rome Bancorp. Rome Savings was originally chartered in 1851 as a New York mutual savings bank. On October 6, 1999, Rome Savings reorganized into a mutual holding company structure and formed Rome Bancorp and Rome, MHC. On April 27, 2004, Rome, MHC, Rome Bancorp and Rome Savings completed their conversions from New York-chartered companies to federally-chartered companies regulated by the Office of Thrift Supervision (the OTS). On March 30, 2005, Rome, MHC completed its second-step conversion and related stock offering and ceased to exist.
Rome Savings is a community and customer-oriented retail savings bank that offers traditional deposit products, residential real estate mortgage loans and consumer, commercial and commercial real estate loans. In addition, Rome Savings purchases securities issued by the U.S. Government and government agencies, municipal securities, mortgage-backed securities and other investments permitted by applicable laws and regulations. At December 31, 2006, Rome Bancorp had assets of $298.8 million, deposits of $196.0 million and stockholders equity of $77.0 million.
Our business will be and has been to hold Rome Savings. Our revenues are derived principally from interest on our loans and interest and dividends on our investment securities. Our primary sources of funds are deposits, payments of loan principal and mortgage-backed securities, maturities and calls of investment securities, and funds provided by operations.
Operations are conducted out of our executive office in Rome, New York and three branch offices located in Oneida County, New York, two of which are located in Rome and one in New Hartford, New York. A new branch in the Town of Lee, Oneida County is anticipated to open in the spring of 2007. As of June 30, 2006, Rome Savings maintained a 5.63% share of all Oneida County, New York deposits, ranking 6th in size of deposits in Oneida County. Rome Savings also maintained a 43.77% market share of all reported funds on deposit in the City of Rome as of June 30, 2006, making it the largest depository institution in Rome.
Our geographic market area for loans and deposits is principally Oneida County, New York. The local economy is not dependent on one key employer. The principal employment sectors are service-related (excluding financial industries), wholesale and retail trade, and manufacturing.
Similar to national trends, most of the job growth currently realized in Oneida County has been in service related industries, and service jobs now account for the largest portion of the workforce. Our market area also includes a growing number of healthcare, engineering, software, and technical firms that have located in Oneida County in order to take advantage of its well-educated work force, including current and former military and defense industry personnel. Rome, New York is located 15 miles west of Utica and approximately 45 miles east of Syracuse. On occasion and depending on market conditions, we also originate loans in the greater New York City metropolitan area, typically through loan participations, and outside of New York State. At December 31, 2006, Rome Savings total loan portfolio consisted of $258.5 million in loans located in the State of New York, while $6.0 million of such loans consisted of loans made outside of New York.
Our future growth opportunities will be influenced by growth and stability in the regional and statewide economies, other demographic trends and the competitive environment. We believe that Rome Savings has developed lending products and marketing strategies to address the credit-related needs of the residents in our local market area.
Rome Savings faces intense competition both in making loans and attracting deposits. New York has a high concentration of financial institutions, many of which are branches of large money center and regional banks which have resulted from the consolidation of the banking industry in New York and surrounding states. Some of these competitors have greater resources than we do and may offer services that we do not provide. For example, Rome Savings does not provide trust or investment services, or credit cards. Customers who seek one-stop shopping may be drawn to these institutions.
Competition for loans comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, insurance companies, and brokerage and investment banking firms. The most direct competition for deposits has historically come from credit unions, commercial banks, savings banks, and savings and loan associations. Rome Savings faces additional competition for deposits from short-term money market funds, corporate and government securities funds, and from brokerage firms, mutual funds, and insurance companies.
General. Rome Savings has a long-standing commitment to originate commercial real estate, commercial and consumer loans, in addition to a traditional emphasis on residential lending. We currently retain substantially all of the loans that we originate. In the future, Rome Savings may sell longer term loans
into the secondary market. At December 31, 2006, Rome Savings had total loans of $264.5 million, of which $137.2 million, or 51.87%, were one- to four-family residential mortgages and building loans. Of residential mortgage loans outstanding at that date, 25.50% were adjustable-rate mortgage loans and 74.50% were fixed-rate loans. The remainder of Rome Savings loans at December 31, 2006, amounting to $127.3 million, or 48.13% of total loans, consisted of commercial real estate, commercial loans, and consumer loans. Rome Savings originates commercial real estate and commercial business loans both within and outside of Oneida County, New York. As of December 31, 2006, 20.77% of Rome Savings loan portfolio was in commercial real estate loans and 9.14% was in commercial loans. In addition, as of December 31, 2006, 18.22% of Rome Savings loan portfolio was in consumer loans.
Our loans are subject to federal and state laws and regulations. The interest rates we charge on loans are affected principally by the demand for loans, the supply of money available for lending purposes and the interest rates offered by our competitors. These factors are, in turn, affected by general and local economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
Loan Portfolio. The following table sets forth the composition of our mortgage and other loan portfolios, by type of loan, in dollar amounts and in percentages at the dates indicated.
Loan Maturity. The following table presents the contractual maturity of our loan portfolio at December 31, 2006. The table does not include the effect of prepayments or scheduled principal amortization.
The following table presents, as of December 31, 2006, the dollar amount of all loans, due after December 31, 2007, and whether these loans have fixed interest rates or adjustable interest rates.
The following table presents Rome Savings loan originations, purchases, sales, and principal payments for the periods indicated.
Residential Mortgage Lending. Rome Savings emphasizes the origination of mortgage loans secured by one- to four-family properties that serve as the primary residence of the owner. As of December 31, 2006, loans on one-to four-family residential properties accounted for $137.2 million, or 51.87%, of Rome Savings total loan portfolio. Of residential mortgage loans outstanding on that date, 25.50% were adjustable-rate mortgage loans and 74.50% were fixed rate loans. Rome Savings may seek to expand its residential lending activities primarily through the marketing and sale to the secondary market of longer term fixed-rate mortgage loans. Management of Rome Savings believes that the expansion of Rome Savings residential lending will enhance its reputation as a service-oriented institution that meets the needs of its local community.
Most of Rome Savings loan originations are from existing or past customers, members of Rome Savings local communities or referrals from local real estate agents, attorneys, and builders. Management of Rome Savings believes that its branch offices could be a significant source of new loan generation.
Rome Savings mortgage loan originations are generally for terms from 10 to 30 years, amortized on a monthly basis with interest and principal due each month. Residential real estate loans may remain outstanding for significantly shorter periods than their contractual terms as borrowers may refinance or prepay loans at their option without penalty. Conventional residential mortgage loans granted by Rome Savings customarily contain due-on-sale clauses that permit Rome Savings to accelerate the indebtedness of the loan upon transfer of ownership of the mortgage property.
As of September 2002, Rome Savings Board of Directors approved a plan to have residential lending policies and procedures conform to secondary market guidelines. In the future, Rome Savings may sell qualifying fixed rate longer term loans into the secondary market, but expects to continue to retain fixed rate loans with maturities of shorter terms. Rome Savings allows residential mortgage loans with a loan to value ratio up to 103%. All mortgages originated with a loan-to-value ratio of 90% or greater have Private Mortgage Insurance (PMI) with 25% to 35% coverage. Mortgages between 80 and 90% loan to value ratio may require PMI based on credit scores and other financial attributes of the applicants. These loans are self insured with risk built into a pricing add-on. PMI insurance is not required on loans with an 80% or less loan to value ratio. Rome Savings at times may originate mortgages outside of secondary market guidelines, tailored to the needs of its customers. Commitments issued in these situations are reviewed with the board on a monthly basis. Rome Savings also offers residential construction loans to customers in its primary lending market.
Generally, Rome Savings will make construction loans up to 80% loan to value ratio and up to 95% with PMI. The program allows for mortgagors to receive up to five advances during the construction phase. Rome Savings uses third party board approved inspectors to determine the advance amount and obtains a clear title report prior to making each advance. The loan converts to permanent financing at the end of six months from the initial closing whether the house is completed or not. The interest rate on the permanent financing is locked in at the time of application for the construction/permanent mortgage. Rome Savings receives at closing, in addition to standard fees and closing costs, up to ¾ of 1% of the loan amount as additional income.
Rome Savings also offers adjustable-rate mortgage loans with a maximum term of 30 years. Adjustable-rate loans offered by Rome Savings include loans that provide for an interest rate based on the interest paid on U.S. Treasury securities of corresponding terms plus a margin of up to 2.75%. Rome Savings currently offers adjustable-rate loans with initial rates below those which would prevail under the foregoing computations, based upon a determination of market factors and competitive rates for adjustable-rate loans in its market area. For adjustable-rate loans, borrowers are qualified at the initial rate.
Rome Savings adjustable-rate mortgages include limits on increase or decrease in the interest rate of the loan. The interest rate may increase or decrease by a maximum 2.0% per adjustment period with a ceiling rate of 11% over the life of the loan. The retention of adjustable-rate mortgage loans in our loan portfolio helps reduce exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of the pricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower.
During the year ended December 31, 2006, Rome Savings originated $8.0 million in adjustable-rate residential mortgage loans and $20.9 million in fixed-rate one- to four- family residential loans. Approximately 3.8% of all residential loan originations during fiscal 2006 were re-financings of loans already in Rome Savings portfolio. At December 31, 2006, Rome Savings loan portfolio included $35.0 million in adjustable-rate one- to four-family residential mortgage loans, or 13.23% of its total loan portfolio, and $102.2 million in fixed-rate one-to four- family residential mortgage loans, or 38.64% of its total loan portfolio.
Commercial Real Estate Loans. We originate commercial real estate loans to finance the purchase of real property, which generally consists of developed real estate. In underwriting commercial real estate loans, consideration is given to the propertys historic cash flow, current and projected occupancy, location and physical condition. At December 31, 2006, our commercial real estate loan portfolio consisted of 178 loans, totaling $55.0 million, or 20.79%, of total loans. Most of the commercial real estate portfolio consists of loans which are collateralized by properties in our normal lending area. To a lesser extent, commercial real estate loans are secured by out of market properties. Our commercial real estate loan portfolio is diverse, and does not have any significant loan concentration by type of industry or borrower. We lend up to a maximum loan-to-value ratio of 75% on commercial properties and require a minimum debt coverage ratio of 1.25. Commercial real estate lending involves additional risks compared with one-to-four family residential lending. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan, repayment of such loans may be subject, to a greater extent, to adverse conditions in the real estate market or the economy. Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. Rome Savings loan policies limit the amount of loans to a single borrower or group of borrowers to reduce this risk.
Rome Savings commercial real estate loan portfolio includes $459,000 of construction loans. From time to time Rome Savings approves commercial construction mortgages. Recognizing the risks inherent to this type of lending, it is Rome Savings practice to minimize lending risk by carefully studying project feasibility, developing a detailed knowledge of the borrower/guarantors entire business operation, assessing both primary and secondary sources of repayment, and by structuring the credit in a manner appropriate to the project.
Rome Savings will only consider construction lending where it holds a first position mortgage lien on the subject premises. No construction loan will be advanced without permanent financing approved by Rome Savings or another lender. Commitments from any source other than this bank must be reviewed for capacity and conditions. Rome Savings exposure cannot exceed 75% of the project cost. Rome Savings requires that up-front equity requirements be met in cash or free and clear value of the land directly associated with the project. The ratio of projected cash flow versus debt service coverage must equal or exceed 1.25. Construction loans may have interest only payments until completion of the project but not beyond 12 months. Personal guaranties are required of the principals of closely held entities. Funds are disbursed only after proper documentation of work completed. A 5% to 10% retainage is normally required.
Commercial Loans. In addition to commercial real estate loans, we also engage in small business commercial lending, including business installment loans, lines of credit and other commercial loans. At December 31, 2006, our commercial loan portfolio consisted of 372 loans, totaling $24.2 million, or 9.14% of total loans. A portion of Rome Savings commercial loans are participation loans. Unless otherwise structured as a mortgage on commercial real estate, such loans generally are limited to terms of five years or less. Substantially all such commercial loans have variable interest rates tied to the prime rate. Whenever possible, Rome Savings collateralizes these loans with a lien on commercial real estate or, alternatively, with a lien on business assets and equipment and the personal guarantees from principals of the borrower. Interest rates on commercial loans generally have higher yields than residential mortgages.
Rome Savings offers commercial services administered by Rome Savings commercial loan department that are designed to give business owners borrowing opportunities for modernization, inventory, equipment, construction, consolidation, real estate, working capital, vehicle purchases, and the refinancing of existing corporate debt.
Commercial loans are generally considered to involve a higher degree of risk than residential mortgage loans because the collateral may be in the form of intangible assets and/or inventory subject to market obsolescence. Commercial loans may also involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower. Such risks can be significantly affected by economic conditions. In addition, commercial business lending generally requires substantially greater oversight efforts compared to residential real estate lending. Rome Savings utilizes the services of an outside consultant to conduct on-site reviews of the commercial loan portfolio to ensure adherence to underwriting standards and policy requirements.
Consumer Loans. Rome Savings offers a variety of consumer loans. At December 31, 2006, the consumer loan portfolio totaled $48.2 million or 18.23% of total loans. Consumer loans generally are offered for terms of up to five or 10 years, depending on the collateral, at fixed interest rates. Rome Savings consumer loan portfolio consists primarily of property improvement loans (i.e., home equity loans and home equity lines of credit) and used automobile loans. To a lesser extent, the consumer loan portfolio also includes:
Rome Savings expects consumer lending to be an area of steady lending growth, with installment loans continuing to account for the major portion of our consumer lending volume. Automobile loans currently comprise the largest portion at 36.87% of the consumer loan portfolio, which consists primarily of loans for used cars. Rome Savings makes loans secured by deposit accounts up to 90.0% of the amount of the depositors savings account balance. Rome Savings also makes other consumer loans, which may or may not be secured. The terms of such loans vary depending on the collateral.
Rome Savings provides home equity lines of credit for any purpose, using the applicants principal residence. The normal loan to value for these lines is 90%, with certain conditions allowing for up to 100%. This product has a ten-year interest-only draw period. During this period, principal reductions are at the applicants discretion. At the end of the ten-year period, any outstanding principal balance due is termed out over 15 years with payments to principal plus interest monthly. These lines have a variable interest at prime rate. Access to these lines are by customer checks. All closing costs are waived providing that the line remains open for at least three years. In addition, Rome Savings offers fixed rate amortizing installment home equity loans with terms of five to fifteen years.
Rome Savings makes loans for automobiles, both new and used, directly to the borrowers. The term of automobile loans is generally limited to five years. The financial terms of the loans are determined by the age of the collateral. Rome Savings obtains a title lien on the vehicle and collision insurance policies are required on all these loans. Rome Savings pays a referral fee of no more than $200 to automobile dealers who refer it customers. There is no difference in interest rates and terms for customers who are referred and those who are not.
Consumer loans are generally originated at higher interest rates than residential mortgage loans but also tend to have a higher credit risk than residential loans due to the loan being unsecured or secured by rapidly depreciable assets. Despite these risks, Rome Savings level of consumer loan delinquencies generally has been low. No assurance
can be given, however, that Rome Savings delinquency rate on consumer loans will continue to remain low in the future, or that we will not incur future losses on these activities.
Loan Approval Procedures and Authority. Rome Savings lending policies are established by its Board of Directors. The policies differ depending on the type of loan involved.
Current Lending Procedures. Upon receipt of a completed loan application from a prospective borrower, Rome Savings orders a credit report and verifies certain other information. If necessary, Rome Savings obtains additional financial or credit related information. Rome Savings requires an appraisal for all mortgage loans, including loans made to refinance existing mortgage loans. Appraisals are performed by licensed or certified third-party appraisal firms that have been approved by Rome Savings Board of Directors. Rome Savings requires title insurance on all secondary market mortgage loans and certain other loans. Rome Savings requires borrowers to obtain hazard insurance, and if applicable, Rome Savings may require borrowers to obtain flood insurance prior to closing. Available to borrowers is the option to advance funds on a monthly basis, together with each payment of principal and interest, to a mortgage escrow account from which Rome Savings makes disbursements for items such as real estate taxes, flood insurance, and private mortgage insurance premiums, if required.
One of Rome Savings key operating objectives has been and continues to be maintaining a high level of asset quality. Through a variety of strategies, including but not limited to borrower workout arrangements and aggressive marketing of foreclosed properties, Rome Savings has been proactive in addressing problem and non-performing assets. These strategies, as well as Rome Savings high proportion of one-to-four family mortgage loans, the maintenance of sound credit standards for new loan originations, and loan administration procedures, have resulted in historically low delinquency ratios and, in recent years, a reduction in non-performing assets. These factors have helped strengthen Rome Savings financial condition.
Collection Procedures. When a borrower fails to make required payments on a loan, Rome Savings takes a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. In the case of mortgage loans, Rome Savings mortgage servicing department is responsible for collection procedures from the 15th day up to the 120th day of delinquency. A reminder letter requesting prompt payment is sent on the 25th day. A late charge notice is sent at 30 days. At 30 days, Rome Savings also attempts to establish telephone contact with the borrower. If no contact is established, progressively stronger collection letters are sent on the 45th and 55th days of delinquency. Late charge notices are sent on the 30th and 60th days of the delinquency. Between the 60th and 90th day of delinquency, if telephone contact has not been established or if there has been mail returned, the collector or his or her assistant makes a physical inspection of the property. When contact is made with the borrower at any time prior to foreclosure, Rome Savings attempts to obtain full payment of the amount delinquent or work out a repayment schedule with the borrower in order to avoid foreclosure. It has been Rome Savings experience that most loan delinquencies are cured within 105 days and no legal action is taken.
Rome Savings sends the right to cure foreclosure notice when a loan is approximately 75 days delinquent. This contains a right to cure clause that gives the customer the terms that must be met within 30 days of the date the letter is sent in order to avoid foreclosure action. After this letter expires, Rome Savings sends the loan to committee for approval to foreclose. Rome Savings commences foreclosure if the loan is not brought current by the 120th day of delinquency unless specific limited circumstances warrant an exception. Rome Savings holds property foreclosed upon as other real estate owned. Rome Savings carries foreclosed real estate at its fair market value less estimated selling costs. If a foreclosure action is commenced and the loan is brought current, paid in full, or refinanced before the foreclosure sale, Rome Savings either sells the real property securing the loan at the foreclosure sale or sells the property as soon thereafter as practical. The collection procedures for Federal Housing Association (FHA) and Veterans Administration (VA) one-to-four family mortgage loans follow the collection guidelines outlined by those agencies.
The collection procedures for consumer, commercial, and other loans, include the sending of periodic late notices and letters to a borrower once a loan is past due. Rome Savings attempts to make direct contact with a borrower once a loan is 15 days past due. Rome Savings follows the same collection procedure as mortgages in an
attempt to reach individuals by telephone and sending them letters and notices. Supervisory personnel in Rome Savings lending area and in its collection area review loans 30 days or more delinquent on a regular basis. If collection activity is unsuccessful after 120 days, Rome Savings may charge off a loan and/or refer the matter to its legal counsel for further collection effort. Loans deemed uncollectible by the Collection Department are proposed for charge-off. All loan charge-offs, regardless of amount, are to be approved by both the senior loan officer and the President of Rome Savings. Regardless of amount, all charge-offs are reported to the Board of Directors of Rome Savings at its next scheduled meeting.
Rome Savings policies require that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis. These reports include information on delinquent loans and foreclosed real estate and Rome Savings actions and plans to cure the delinquent status of the loans and to dispose of the real estate.
Non-Performing Assets. Non-performing assets totaled $1.1 million and $947,000 at December 31, 2006 and December 31, 2005, respectively.
The following table presents information regarding non-accrual mortgage and consumer and other loans, accruing loans delinquent 90 days or more, and foreclosed real estate as of the dates indicated.
With the exception of first mortgage loans insured or guaranteed by the FHA or VA or for which the borrower has obtained private mortgage insurance, Rome Savings stops accruing income on loans when interest or principal payments are 90 days in arrears or earlier when the timely collectibility of such interest or principal is doubtful. Rome Savings designates loans on which it stops accruing income as non-accrual loans and it reverses outstanding interest that it previously credited. Rome Savings may recognize income in the period that it collects such income, when the ultimate collectibility of principal is no longer in doubt. Rome Savings returns a non-accrual loan to accrual status when factors indicating doubtful collection no longer exist. Rome Savings defines non-performing loans as loans that are both non-accruing and accruing loans whose payments are 90 days or more past due.
We define the population for evaluation of impaired loans to be all non-accrual commercial real estate and commercial loans greater than $250,000. Impaired loans are individually assessed to determine whether a loans carrying value is not in excess of the fair value of the collateral or the present value of the loans cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and consumer loans, are specifically excluded from the impaired loan portfolio. The Companys recorded investment in loans that are considered impaired totaled $299,000 and $211,000 at December 31, 2006 and 2005, respectively. If all non-accrual loans had been current in accordance with their terms during the year
ended December 31, 2006, 2005 and 2004, interest income on such loans would have amounted to $75,800, $62,500 and $53,300, respectively. At December 31, 2006, Rome Savings had one loan, with a book balance of $138,000 included above which is considered a troubled debt restructuring as defined in SFAS No. 15.
Allowance for Loan Losses. The following table sets forth activity in Rome Savings allowance for loan losses and other ratios at or for the dates indicated.
The allowance for loan losses is a valuation account that reflects our evaluation of the losses inherent in our loan portfolio. We maintain the allowance through provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely.
Our evaluation of risk in maintaining the allowance for loan losses includes the review of all loans on which the collectibility of principal may not be reasonably assured. We consider the following factors as part of this evaluation: our historical loan loss experience, known and inherent risks in the loan portfolio, the estimated value of the underlying collateral and current economic and market trends. There may be other factors that may warrant our consideration in maintaining an allowance at a level sufficient to provide for probable losses. Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future additions may be necessary if economic and other conditions in the future differ substantially from the current operating environment.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. These agencies, including the OTS, may require us to increase the allowance for loan losses or the valuation allowance for foreclosed real estate based on their judgments of information available to them at the time of their examination, thereby adversely affecting our results of operations.
For the year ended December 31, 2006, we increased our allowance for loan losses through a $147,000 provision for loan losses based on our evaluation of the items discussed above. We believe that the allowance for loan
losses accurately reflects the level of risk in the loan portfolio. In addition to the non-performing loans, management has identified, through normal internal credit review procedures, $5.2 million in potential problem loans at December 31, 2006. Payments are current on $4.2 million or 80.77% of these loans. These problem loans are defined as loans not included as non-performing loans, but about which management has developed information regarding possible credit problems, which may cause the borrowers future difficulties in complying with loan repayments. Rome Savings will continue to be aggressive in identifying, monitoring and resolving potential problem loans. See Managements Discussion and Analysis - Comparison of Results of Operations for the Years Ended December 31, 2006, 2005 and 2004 - Provision for Loan Losses.
The following table presents our allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at the periods indicated.
General. The Board of Directors reviews and approves our investment policy on an annual basis. The Board of Directors has delegated primary responsibility for ensuring that the guidelines in the investment policy are followed to the Executive Vice President/Chief Financial Officer. The Executive Vice President/Chief Financial Officer reports to the Asset Liability Management Committee and to the Executive Committee monthly.
Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity within established guidelines. In establishing our investment strategies, we consider our interest rate sensitivity, the types of securities to be held, liquidity and other factors. Federal chartered savings banks have authority to invest in various types of assets, including U.S. Government obligations, securities of various federal agencies, obligations of states and municipalities, mortgage-backed securities, certain time deposits of insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans of federal funds, and, subject to certain limits, corporate debt and commercial paper.
Rome Savings classifies securities as held to maturity or available for sale at the date of purchase. Held to maturity securities are reported at cost, adjusted for amortization of premium and accretion of discount. Available for sale securities are reported at fair market value. Rome Savings classifies U.S. Government securities and U.S. Government agency securities, as available for sale. These securities predominately have maturities of less than five years although Rome Savings also invests in adjustable rate U.S. Government agency securities with maturities up to 15 years. Rome Savings mortgage-backed securities, all of which are directly or indirectly insured or guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) or Federal National Mortgage Association (FNMA), consist of both 30-year securities and seven-year balloon securities. The latter are so named because they mature (i.e., balloon) prior to completing their normal 30-year amortization. The 30 year mortgage-backed securities are classified as held to maturity while the seven-year balloon securities are classified as available for sale.
Rome Savings also invests in privately insured state and municipal obligations with a maturity of fifteen years or less rated AAA by Moodys, Standard & Poors, or Fitch. Rome Savings invests in these securities because of their favorable after tax yields in comparison to U.S. Government and U.S. Government Agency securities of comparable maturity. These securities are classified as available for sale. Rome Savings purchases A and AA rated corporate bonds, principally of financial institutions, as means of increasing yields on available for sale investments while minimizing risk. In the past three years, spreads to the comparable three to five year government agency securities, which Rome Savings had typically purchased, has been 15 - 97 basis points favoring these corporate bonds. Finally, Rome Savings and Rome Bancorp have investments in Federal Home Loan Bank (FHLB) stock and other equity securities, which are classified as available for sale.
The following table presents the composition of our securities portfolios in dollar amount and in percentage of each investment type at the dates indicated. It also presents the coupon type for the mortgage-backed securities portfolio.
Carrying Values, Yields and Maturities. The following table sets forth the scheduled maturities, book value, market value and weighted average yields for Rome Savings debt securities at December 31, 2006.
Deposit Activity and Other Sources of Funds
General. Deposits, borrowings, scheduled amortization and prepayments of loan principal, maturities and calls of investments securities and funds provided by operations are our primary sources of funds for use in lending, investing and for other general purposes. See Managements Discussion and Analysis - Liquidity and Capital Resources.
Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. We currently offer regular savings deposits (consisting of passbook and statement savings accounts), interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts and time deposits.
Deposit flows are influenced significantly by general and local economic conditions, changes in prevailing interest rates, pricing of deposits and competition. Our deposits are primarily obtained from areas surrounding our offices and we rely primarily on paying competitive rates, service and long-standing relationships with customers to attract and retain these deposits. We do not use brokers to obtain deposits.
When we determine our deposit rates, we consider local competition, U.S. Treasury securities offerings and the rates charged on other sources of funds. Core deposits (defined as savings deposits, money market accounts and demand accounts) represented 66.1% and 67.1% of total deposits on December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, time deposits with remaining terms to maturity of less than one year amounted to $43.9 million and $43.5 million, respectively. See Managements Discussion and Analysis - Analysis of Net Interest Income for information relating to the average balances and costs of our deposit accounts for the years ended December 31, 2006, 2005 and 2004.
At December 31, 2006, we had $13.1 million in time deposits with balances of $100,000 or more maturing as follows:
Borrowings. At December 31, 2006 the Company had outstanding borrowings of $20.2 million which were used to fund loan growth, purchase treasury stock and finance other investments. In the future, we expect to continue to utilize borrowings as a funding source and may borrow funds pursuant to repurchase agreements, whereby we sell an asset with an agreement to repurchase it at some future date. We are a member of the Federal Home Loan Bank of New York and have available a line of credit of $62.7 million, of which $50.9 million remained available at December 31, 2006.
Rome Savings has four subsidiaries: 100 On the Mall Corporation, Clocktower Insurance Agency Incorporated, RSB Properties, Inc. and RSB Capital Inc. 100 On the Mall acts as a manager, and developer of real estate. Its only activity is ownership of Rome Savings main office building and premises. Clocktower Insurance owns real estate for future expansion, which is currently being leased to a Dunkin Donuts franchise adjacent to one of our branch offices. RSB Properties, Inc. is a real estate investment trust. RSB Capital, Inc. is currently inactive.
At December 31, 2006, Rome Savings had 99 full-time employees and 1 part-time employee. Rome Savings employees are not represented by a collective bargaining agreement, and Rome Savings considers its relationship with its employees to be good.
REGULATION AND SUPERVISION
General. Rome Bancorp is regulated as a savings and loan holding company by the Office of Thrift Supervision (the OTS). Rome Bancorp is required to file reports with and otherwise comply with the rules and regulations of the OTS and the SEC under the federal securities laws. Rome Savings, as a federal savings bank, is subject to regulation, examination and supervision by the OTS as its chartering authority, and by the Federal Deposit Insurance Corporation (the FDIC) as its deposit insurer. Rome Savings must file reports with the OTS and the FDIC concerning its activities and financial condition.
The following references to the laws and regulations under which Rome Bancorp and Rome Savings are regulated are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such laws and regulations. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies under the applicable laws and regulations. Any change in such laws, regulations or policies, whether by the OTS, the FDIC, the SEC or the Congress, could have a material adverse impact on Rome Bancorp and Rome Savings, and their operations and stockholders.
Regulation of Federal Savings Associations
Business Activities. Rome Savings derives its lending and investment powers from the Home Owners Loan Act, as amended (the HOLA), and the regulations of the OTS. The HOLA and the OTS regulations also limit Rome Savings authority to invest in certain types of loans or other investments. Permissible investments include mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. Rome Savings may also establish service corporations that may engage in activities not otherwise permissible for Rome Savings, including certain real estate equity investments.
Loans to One Borrower. Rome Savings is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, Rome Savings total loans or extensions of credit to a single borrower cannot exceed 15% of Rome Savings unimpaired capital and surplus which does not include accumulated other comprehensive income. Rome Savings may lend additional amounts up to 10% of its unimpaired capital and surplus which does not include accumulated other comprehensive income, if the loans or extensions of credit are fully-secured by readily-marketable collateral. Rome Savings currently complies with applicable loans-to-one borrower limitations.
QTL Test. Under the HOLA, Rome Savings must comply with the qualified thrift lender, or QTL, test. Under the QTL test, Rome Savings is required to maintain at least 65% of its portfolio assets in certain qualified thrift investments in at least nine months of the most recent 12-month period. Portfolio assets mean, in general, Rome Savings total assets less the sum of:
Rome Savings may also satisfy the QTL test by qualifying as a domestic building and loan association as defined in the Internal Revenue Code of 1986. If Rome Savings fails the QTL test, and is unable to correct that failure for a period of time, it must either operate under certain restrictions on its activities or convert to a bank charter.
Rome Savings met the QTL test at December 31, 2006, and in each of the prior 12 months and, therefore is a qualified thrift lender.
Capital Requirements. OTS regulations require savings associations to meet three minimum capital standards:
The minimum leverage capital ratio for any other depository institution that does not have a composite rating of 1 will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulations based on the risks found by the OTS to be inherent in the type of asset.
Tangible capital is defined, generally, as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital (or Tier 1 capital) is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital (or Tier 2 capital) includes cumulative and other preferred stock, mandatory convertible debt securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in Tier 2 capital. The allowance for loan and lease losses includable in Tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets.
At December 31, 2006, Rome Savings met each of its capital requirements.
Community Reinvestment Act. Under the Community Reinvestment Act (the CRA), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institutions discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the savings associations record of meeting the credit needs of its community and to take such record into account in its evaluation of certain
applications by such savings association. The CRA also requires all institutions to make public disclosure of their CRA ratings.
The CRA regulations establish an assessment system that bases a savings associations rating on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests:
Rome Savings received a Satisfactory CRA rating in its most recent examination, dated January 16, 2007.
Transactions with Affiliates. Rome Savings authority to engage in transactions with its Aaffiliates is limited by the OTS regulations, the Federal Reserve Boards Regulation W and Sections 23A and 23B of the Federal Reserve Act (the FRA), as made applicable to federal savings associations by the HOLA and the OTS regulations. In general, these transactions must be on terms which are as favorable to Rome Savings as comparable transactions with non-affiliates. In addition, certain types of these transactions referred to as covered transaction are subject to quantitative limits based on a percentage of Rome Savings capital, thereby restricting the total dollar amount of transactions Rome Savings may engage in with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between 100% and 130% of the covered transaction in order to receive loans from Rome Savings. In addition, applicable regulations prohibit a savings association from lending to any of its affiliates that engage in activities that are not permissible for bank holding companies and from purchasing low-quality (i.e., non-performing) assets from an affiliate or purchasing the securities of any affiliate, other than a subsidiary.
Loans to Insiders. Rome Savings authority to extend credit to its directors, executive officers and principal shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board, as made applicable to federal savings associations by the HOLA and the OTS regulations. Among other things, these provisions require that extensions of credit to insiders:
In addition, extensions for credit to insiders in excess of certain limits must be approved by Rome Savings Board of Directors.
Enforcement. The OTS has primary enforcement responsibility over savings associations, including Rome Savings. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations as well as in response to unsafe or
Standards for Safety and Soundness. Pursuant to the Federal Deposit Insurance Act (the FDIA), the OTS has adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and mange the risks and exposures specified in the guidelines.
In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order a savings association that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being notified, a savings association fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the OTS must issue an order directing action to correct the deficiency. Further, the OTS may issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized savings association is subject under the prompt corrective action provisions of the FDIA. If a savings association fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Limitations on Capital Distributions. The OTS imposes various restrictions or requirements on Rome Savings ability to make capital distributions, including the payment of cash dividends. A savings association that is the subsidiary of a savings and loan holding company must file a notice with the OTS at least 30 days before making a capital distribution. Rome Savings must file an application for prior approval if the total amount of its capital distributions for the applicable calendar year would exceed an amount equal to Rome Savings net income for that year plus Rome Savings retained net income for the previous two years.
The OTS may disapprove a notice or application if:
Rome Bancorps ability to pay dividends, service debt obligations and repurchase common stock is dependent upon receipt of dividend payments from Rome Savings.
Liquidity. Rome Savings is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
Prompt Corrective Action Regulations. Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of the following four categories based on the associations capital:
When appropriate, the OTS can require corrective action by a savings association holding company under the prompt corrective action provision of the FDIA.
At December 31, 2006, Rome Savings met the criteria for being considered well-capitalized.
Insurance of Deposit Accounts. Rome Savings is a member of the Deposit Insurance Fund (the DIF), maintained by the FDIC, and Rome Savings pays its deposit insurance assessments to the DIF. The DIF was formed on March 31, 2006 following the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the DIF Act). In addition to merging the insurance funds, the DIF Act established a statutory minimum and maximum designated reserve ratio for the Deposit Insurance Fund and granted the FDIC greater flexibility in establishing the required reserve ratio. In its regulations implementing the DIF Act, the FDIC has set the current annual designated reserve ratio for the DIF at 1.25%.
In order to maintain the DIF, member institutions are assessed an insurance premium. The amount of each institutions premium is currently based on the balance of insured deposits and the degree of risk the institution poses to the DIF. Under the assessment system, the FDIC assigns an institution to one of nine risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory subgroup assignment). Each risk category is assigned an assessment rate. Assessment rates currently range from 0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.43% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concerns). The FDIC is authorized to raise the assessment rates as necessary to maintain the Deposit Insurance Fund. The Rome Savings assessment rate at December 31, 2006 was 0%. Any increase in insurance assessments could have an adverse effect on the earnings of insured institutions, including Rome Savings.
In addition, all FDIC -insured institutions are required to pay a pro rata portion of the interest due on obligations issued by the Financing Corporation to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation. At December 31, 2006, the FDIC assessed DIF-insured deposits 1.24 basis points per $100 of deposits to cover those obligations. The Financing Corporation rate is adjusted quarterly to reflect changes in assessment bases of the DIF. This obligation will continue until the Financing Corporation bonds mature in 2017.
Federal Home Loan Bank System. Rome Savings is a member of the Federal Home Loan Bank (the FHLB) of New York, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. Rome Savings, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in the FHLB of New York. While the required percentages of stock ownership are subject to change by the FHLB, Rome Savings was in compliance with this requirement with an investment in FHLB of New York stock at December 31, 2006 of $1.3 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, Rome Savings net interest income would be affected.
Federal Reserve System. Rome Savings is subject to provisions of the FRA and the Federal Reserve
Boards regulations pursuant to which depository institutions may be required to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations exempt $8.5 million of otherwise reservable balances from the reserve requirements. A 3.0% reserve is required for transaction account balances over $8.5 million and up to $45.8 million. Transaction account balances over $45.8 million are subject to a reserve requirement of $1,119,000 plus 10% of the amount over $45.8 million. Rome Savings is in compliance with these requirements. Because required reserves must be maintained in the form of either vault cash, a noninterest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce Rome Savings interest-earning assets. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve discount window, but Federal Reserve Board regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
Prohibitions Against Tying Arrangements. Federal savings associations are subject to prohibitions on certain tying arrangements. A federal savings association is prohibited, subject to some exceptions, from extending credit or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the savings association or its affiliates or not obtain credit or services of a competitor of the savings association.
The Bank Secrecy Act. Rome Savings and Rome Bancorp are subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. By way of example, the Bank Secrecy Act imposes an affirmative obligation on Rome Savings to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious.
Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among financial institutions, 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. Among other requirements, the USA PATRIOT Act imposes the following obligations on financial institutions:
Office of Foreign Asset Control. Rome Savings and Rome Bancorp, like all United States companies and individuals, are prohibited from transacting business with certain individuals and entities named on the Office of Foreign Asset Controls list of Specially Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The Office of Foreign Asset Control has issued guidance directed at financial institutions in which it asserts that it may, in its discretion, examine institutions determined to be high-risk or to be lacking in their efforts to comply with these prohibitions.
Holding Company Regulation
Rome Bancorp is a savings and loan holding company regulated by the OTS. As such, Rome Bancorp is registered with and subject to OTS examination and supervision, as well as certain reporting requirements. In addition, the OTS has enforcement authority over Rome Bancorp and any of its non-savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings association. Unlike bank holding companies, federal savings and loan holding companies are not subject to regulatory capital requirements or to supervision by the Federal Reserve Board.
HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control (as defined under HOLA) of another savings association without prior OTS approval. In addition, a savings and loan holding company is prohibited from directly or indirectly acquiring control of any depository institution not insured by the FDIC (except through a merger with and into the holding companys savings association subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate subsidiary a savings association that has a principal office outside of the state where the principal office of its subsidiary savings association in located, except, (i) in the case of certain emergency acquisitions approved by the FDIC; (ii) if the holding company controls a savings association subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or (iii) if the laws of the home state of the savings association to be acquired specifically authorize a savings association chartered by that state to be acquired by a savings association chartered by the state where the acquiring savings association or savings and loan holding company is located or by a holding company that controls such a state chartered savings association.
Under the Gramm Leach Bliley Act (the GLB Act) Rome Bancorp is prohibited from engaging in non-financial activities. As a result, Rome Bancorps activities are restricted to:
Permissible activities which are deemed to be financial in nature or incidental thereto under section 4(k) of the BHCA include:
In addition, Rome Bancorp cannot acquire or be acquired by a company unless the company is engaged solely in financial activities.
Transactions between the Rome Savings and Rome Bancorp and its other subsidiaries are subject to various conditions and limitations. See Regulation of Federal Savings Associations - Transactions with Affiliates and Regulation of Federal Savings Associations - Limitation on Capital Distributions.
Federal Securities Laws. Rome Bancorps common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Rome Bancorp is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.
The Sarbanes-Oxley Act. As a public company, Rome Bancorp is subject to the Sarbanes-Oxley Act, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Acts principal legislation and the derivative regulation and rule making promulgated by the SEC includes:
Section 402 of the Sarbanes-Oxley Act prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as Rome Savings, that are subject to the insider lending restrictions of Section 22(h) of the FRA.
Quotation on Nasdaq. Rome Bancorps common stock is quoted on The Nasdaq Stock Market. In order to maintain such quotation, Rome Bancorp is subject to certain corporate governance requirements, including:
Our loan portfolio includes loans with a higher risk of loss. Rome Savings originates commercial mortgage loans, commercial loans, consumer loans and residential mortgage loans primarily within its market area, although a number of loans are in other states. Commercial mortgage, commercial, and consumer loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. These loans also have greater credit risk than residential real estate for the following reasons:
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease. Our loan customers may not repay their loans according to the terms of the loans, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We therefore may experience significant loan losses, which could have a material adverse effect on our operating results.
Material additions to our allowance also would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for loan losses. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance.
Our emphasis on a diverse loan portfolio has been one of the more significant factors we have taken into account in evaluating our allowance for loan losses and provision for loan losses. If we were to further increase the amount of loans in our portfolio other than traditional real estate loans, we may decide to make increased provisions for loan losses. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs.
Our return on equity is low compared to other companies. Net earnings divided by average equity, known as return on equity, is a ratio many investors use to compare the performance of a financial institution to its peers. Our return on average equity amounted to 2.91% and 4.29% in 2006 and 2005 respectively. As a result of the second-step stock conversion and offering completed in March of 2005, we currently have capital proceeds to deploy into high-yielding earning assets. Our ability to leverage our new capital profitably will be significantly affected by industry competition for loans and deposits. Until the stock proceeds are fully invested in long-term interest earning assets, we expect our return on equity to be below our historical rations and the industry average, which may negatively impact the value of our stock.
Because Rome Savings loans are concentrated in a small geographical area, downturns in its local economy may affect its profitability and future growth possibilities. In recent years, Oneida County has experienced a negative population growth rate. While the local economy has been improving in recent years, it has not enjoyed the rate of economic growth experienced in other parts of the United States. In the event of an economic downturn, we may have greater risk of loan defaults and experience deposit runoff in our primary market area, which could have an adverse impact on our profitability.
Low demand for real estate loans may lower our profitability. Making loans secured by real estate, including one-to-four family and commercial real estate, is our primary business and primary source of revenue. If customer demand for real estate loans decreases, our profits may decrease because our alternative investments, primarily securities, earn less income for us than real estate loans. Customer demand for loans secured by real estate could be reduced by a weaker economy, an increase in unemployment, a decrease in real estate values or an increase in interest rates.
We depend on our executive officers and key personnel to implement our business strategy and could be harmed by the loss of their services. We believe that our growth and future success will depend in large part upon the skills of our management team, particularly Charles M. Sprock, our President and Chief Executive Officer. The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel. Although we have an employment agreement with our President and Chief Executive Officer that contains a non-compete provision, the loss of the services of one or more of our executive officers could impair our ability to continue to develop our business strategy.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We devote significant attention to establishing and maintaining effective internal controls. We document, review and, if appropriate, improve our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. Both we and our independent auditors annually test our internal controls in connection with the Section 404 requirements and could identify areas for further attention or improvement. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Any such failure could also adversely affect our assessment of the effectiveness of our internal control over financial reporting. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the market price of our stock.
We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations. We are subject to extensive regulation, supervision and examination by the OTS and by the Federal Deposit Insurance Corporation, as insurer of deposits. Such regulation and supervision governs the activities in which Rome Savings and we may engage and are intended primarily for the protection of the insurance fund and deposits of Rome Savings. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of Rome Savings, the classification of its assets and the adequacy of its 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 holding companies, could have a material impact on the combined operations of us and Rome Savings.
Competition in our primary market area may reduce our ability to attract and retain deposits and obtain loans. We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Historically, our most direct competition for savings deposits has come from credit unions, community banks, large commercial banks and thrift institutions in our primary market area. Particularly in times of extremely low or extremely high interest rates, we have faced additional significant competition for investors funds from brokerage firms and other firms short-term money market securities and corporate and government securities. Our competition for loans comes principally from mortgage bankers,
commercial banks, other thrift institutions, and insurance companies. Such competition for the origination of loans may limit our future growth and earnings prospects. Competition for loan originations and deposits may limit our future growth and earnings prospects.
Changes in interest rates could adversely affect our results of operations and financial condition. Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities.
Our certificate of incorporation, bylaws and certain laws and regulations may prevent transactions you might favor, including a sale or merger of Rome Bancorp. Provisions of our Certificate of Incorporation and Bylaws, federal regulations and various other factors may make it more difficult for companies or persons to acquire control of us without the consent of our Board of Directors. It is possible, however, that you would want a takeover attempt to succeed because, for example, a potential buyer could offer a premium over the then-prevailing price of our common stock. The factors that may discourage takeover attempts or make them more difficult include:
We conduct our business through our executive office, operations center, which includes both the Mortgage Center and the Accounting Center listed below, and three banking offices. A fourth banking office in Lee, New York is under construction and expected to open in the early spring of 2007. In addition, the Company has purchased land in Oneida, New York for potential expansion into that market. At December 31, 2006, the net book value of the computer equipment and other furniture, fixtures and equipment of Rome Savings and Rome Bancorp at their offices totaled $6,072,000. For more information, see Note 5 of Notes to Consolidated Financial Statements, in the Companys 2006 Annual Report to shareholders (the Annual Report), which is incorporated herein by reference.
As of the date of this Form 10-K, we are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are immaterial to our financial condition and results of operations.
The following information included in the Annual Report attached hereto as Exhibit 13.1 is incorporated herein by reference: Market for the Companys Common Stock.
The following information included in Annual Report attached hereto as Exhibit 13.1 is incorporated herein by reference: Selected Financial and Other Data.
The following information included in the Annual Report attached hereto as Exhibit 13.1 is incorporated herein by reference: Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following information included in the Annual Report attached hereto as Exhibit 13.1 is incorporated herein by reference: Managements Discussion and Analysis of Financial Condition and Results of Operations - Management of Interest Rate Risk.
The following information included in the Annual Report attached hereto as Exhibit 13.1 is incorporated herein by reference: Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting, Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements and Notes to Consolidated Financial Statements.
Evaluation of Disclosure Controls and Procedures
Management, including the Companys President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Companys President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required, and (ii)
accumulated and communicated to the Companys management, including the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Managements annual report on internal control over financial reporting appears in the Companys Annual Report to Shareholders for the year ended December 31, 2006, which is included as Exhibit 13.1 of this report, and is incorporated herein by reference.
The attestation report of the Companys registered public accounting firm on managements assessment of the Companys internal control over financial reporting appears in the Companys Annual Report to Shareholders for the year ended December 31, 2006, which is included as Exhibit 13.1 of this report, and is incorporated herein by reference.
There have been no changes in the Companys internal control over financial reporting identified in connection with the evaluation that occurred during the Companys last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Companys internal control over financial reporting.
On January 12, 2007, the Audit Committee of the Company determined, based on its review and consultation with the Companys independent registered public accounting firm, that the Company should restate its financial statements for the quarterly periods ended June 30, 2006 and September 30, 2006, as filed on Form 10-Q. The restatement was necessary in order to immediately fully expense the award of certain stock-based compensation grants at the award date for those recipients who were eligible for retirement at the award grant date. The Company had been expensing these grants over a five year service vesting period. In light of the Companys restatement of prior period financial statements, the Company has enhanced internal reviews of related financial reporting requirements.
The following information included in the Proxy Statement is incorporated herein by reference: Proposal 1- Election of Directors and the following subsections of the section entitled Information About Our Board of Directors and Management: Board of Directors, Committees of the Board, Executive Officers Who Are Not Directors and Section 16(a) Beneficial Ownership Reporting Compliance.
Code of Ethics
Rome Bancorp has adopted a Code of Conduct and Ethics, which applies to all employees, directors and officers of Rome Bancorp including the principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions. The Code of Conduct and Ethics meets the requirements of a code of ethics as defined by Item 406 of Regulation S-K. The Code of Conduct and Ethics was filed as Exhibit 14.1 to the Form 10-KSB for the year ended December 31, 2003, and has not changed.
You may obtain a copy of the Code of Conduct and Ethics, free of charge, by sending a request in writing to Crystal M. Seymore at the following address:
The information included in the Proxy Statement is incorporated herein by reference: Compensation.
The following section included in the Proxy Statement is incorporated herein by reference: Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2006.
The following information included in the Proxy Statement is incorporated herein by reference: Transactions with Certain Related Persons.
The following information included in the Proxy Statement is incorporated herein by reference: Principal Accounting Fees and Services and Audit Committee Preapproval Policy.
(a) The following financial statements included in the Annual Report attached hereto as Exhibit 13.1 are incorporated herein by reference:
(b) The following exhibits are either filed as part of this report or are incorporated herein by reference:
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.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.