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Rome Bancorp 10-K 2011 Documents found in this filing:U.S. SECURITIES AND EXCHANGE COMMISSION FORM 10-K ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE For the fiscal year ended December 31, 2010
100
W. Dominick Street, Rome, New York 13440-5810 Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if 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 Securities Exchange Act of 1934. 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 Act 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No x Based on the closing sales price on June 30, 2010, the aggregate market value of the voting stock held by non-affiliates of the registrant was $49,112,000. Rome Bancorp had 6,777,551 shares of common stock outstanding as of March 15, 2011. 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.
Available Information The Company files annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (“Exchange Act”). The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at www.sec.gov. The Company also makes available free of charge through its website (www.romesavings.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. General 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 Bancorp’s principal business is to hold the capital stock of Rome Savings. Rome Savings 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 4 offering and ceased to exist. On October 12, 2010, Berkshire Hills Bancorp, Inc., the parent company of Berkshire Bank, and the Company entered into an Agreement and Plan of Merger pursuant to which the Company will merge with and into Berkshire Hills Bancorp, Inc. Concurrent with the merger, it is expected that the Bank will merge with and into Berkshire Bank. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of the Company, and is currently expected to be completed on or about April 1, 2011. 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, 2010, Rome Bancorp had assets of $327.2 million, deposits of $225.3 million and stockholders’ equity of $60.7 million. Business Strategy Our business is to hold the capital stock of 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, borrowings from the Federal Home Loan Bank, and funds provided by operations. Market Area Operations are conducted out of our executive office in Rome, New York and four branch offices located in Oneida County, New York, two of which are located in Rome, one in New Hartford, New York and one in Lee, New York. As of June 30, 2010, Rome Savings maintained a 7.34% share of all Oneida County, New York deposits, ranking sixth in size of deposits in Oneida County. Rome Savings also maintained a 40.95% market share of all reported funds on deposit in the City of Rome as of June 30, 2010, 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, in recent years most of the job growth 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. Depending on market conditions, we also occasionally originate loans in the greater New York City metropolitan area, typically through loan participations, and outside of New York State. At December 31, 2010, Rome Savings’ total loan portfolio consisted of $265.9 million in loans located in the State of New York, while $2.5 million of such portfolio 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. 5 Competition 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. Lending Activities 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 retain the majority of the loans that we originate. Currently, we are selling most of the longer term residential mortgage loans we originate into the secondary market. At December 31, 2010, Rome Savings had total loans of $268.4 million, of which $144.7 million, or 53.91%, were one- to four-family residential mortgages and residential construction loans. Of residential mortgage loans outstanding at that date, 20.43% were adjustable-rate mortgage loans and 79.57% were fixed-rate loans. The remainder of Rome Savings’ loans at December 31, 2010, amounting to $123.7 million, or 46.09% 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, 2010, 18.07% of Rome Savings’ loan portfolio was in commercial real estate loans and 11.17% was in commercial loans. In addition, as of December 31, 2010, 16.85% 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. 6 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.
7 Loan Maturity. The following table presents the contractual maturity of our loan portfolio at December 31, 2010. The table does not include the effect of prepayments or scheduled principal amortization.
The following table presents, as of December 31, 2010, the dollar amount of all loans, due after December 31, 2011, 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.
8 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. Rome Savings does not originate subprime or interest only mortgage loans. As of December 31, 2010, loans on one-to four-family residential properties accounted for $144.7 million, or 53.91%, of Rome Savings’ total loan portfolio. Of residential mortgage loans outstanding on that date, 20.43% were adjustable-rate mortgage loans and 79.57% were fixed-rate loans. Rome Savings has expanded 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 are 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. Rome Savings’ residential lending policies and procedures conform to secondary market guidelines. Currently, Rome Savings’ sells the majority of its newly originated qualifying fixed-rate longer-term loans into the secondary market, but continues to retain fixed rate loans with maturities of shorter terms. Rome Savings originates residential mortgage loans with a loan to value ratio up to 95%. Private mortgage insurance is not required on loans with an 80% or less loan to value ratio. All mortgages originated with a loan to value above 80% and up to 95% require private mortgage insurance with 17% to 30% coverage. 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 of Directors on a monthly basis. Rome Savings also offers residential construction loans to customers in its primary lending market. Private mortgage insurance is not currently available on construction loans. Rome Savings will make construction loans up to a 90% loan to value ratio. 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. Construction loans up to an 80% loan to value ratio carry a pricing premium of 0.50% to the interest rate. Construction loans with a loan to value ratio of over 80% and up to 90% carry an additional pricing premium to the interest rate of 0.25% to 0.50%. All construction loans carry a fee of 0.50% of the loan amount payable at closing in addition to standard fees and closing costs. Rome Savings’ adjustable-rate mortgages currently in portfolio 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, 2010, Rome Savings originated no adjustable-rate residential mortgage loans and $41.9 million in fixed-rate one- to four- family residential loans. Approximately 32.64% of all residential loan originations during fiscal 2010 were refinancings of loans already in Rome Savings’ portfolio. At December 31, 2010, Rome Savings’ loan portfolio included $29.6 million in adjustable-rate one to four-family residential mortgage loans, or 11.03% of its total loan portfolio, and $115.1 million in fixed-rate one to four-family residential mortgage loans, or 42.88% of its total loan portfolio. 9 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 property’s’ historic cash flow, current and projected occupancy, location and physical condition. At December 31, 2010, our commercial real estate loan portfolio consisted of 149 loans, totaling $48.5 million, or 18.07%, 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. A portion of Rome Savings’ commercial mortgages are participation loans. 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, or on the successful operation of the owner’s business for owner occupied properties, repayment of such loans may be affected by 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 $38,000 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/guarantor’s 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 term loans, lines of credit and other commercial loans. At December 31, 2010, our commercial loan portfolio consisted of 459 loans, totaling $30.0 million, or 11.17% of total loans. A portion of Rome Savings’ commercial loans are participation loans. Term loans are typically limited to a term of five years. Substantially all lines of credit have variable interest rates tied to the prime rate. Typically, Rome Savings collateralizes these loans with a lien on business assets and equipment, occasionally commercial real estate, plus 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. 10 Consumer Loans. Rome Savings offers a variety of consumer loans. At December 31, 2010, the consumer loan portfolio totaled $45.2 million or 16.85% of total loans. Consumer loans generally are offered for terms of up to 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 a continuing source of loan volume, with installment loans continuing to account for the major portion of our consumer lending volume. Property improvement loans, currently comprises the largest portion of the consumer loan portfolio at 51.92%. Rome Savings makes loans secured by deposit accounts up to 90% of the amount of the depositor’s 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 applicant’s principal residence. The normal loan to value for these lines is 90%. This product has a ten-year interest-only draw period. During this period, principal reductions are at the applicant’s 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 is 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 up 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 $225 to automobile dealers who refer it customers. There is no difference in the interest rates and terms offered to 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 depreciating 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 it 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.
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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 requires borrowers to obtain flood insurance prior to closing. Also available to borrowers is the option to advance funds on a monthly basis, together with each payment of principal and interest, to a 12 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. Asset Quality 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 low delinquency ratios and, in comparison to peer institutions, a relatively low level of 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’ servicing department is responsible for collection procedures from the 15th day up to the 120th day of delinquency. A late charge notice is sent at 15 days. A reminder letter requesting prompt payment is sent on the 25th day. 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, a recommendation for foreclosure is presented to the Board of Directors for approval. Upon approval the loan is forwarded to outside legal counsel to commence the foreclosure action. If a foreclosure action is commenced and the loan is brought current, paid in full, or refinanced before the foreclosure sale, is held, the foreclosure action would be terminated. If Rome Savings becomes the owner of the real property at the foreclosure sale, it is held as other real estate owned. The property is valued at fair market value less estimated selling costs. Other real estate property is actively marketed and sold by the Bank as soon 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 an outside collection agency or to the Bank’s legal counsel for further collection effort. Monthly, loans deemed uncollectible are proposed for charge-off. Charge-offs up to $10,000 may be approved by the Bank’s senior loan officer. Charge-offs $10,000 and greater require approval of both the senior loan officer and the President of Rome Savings. 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 $3.0 million and $1.9 million at December 31, 2010 and December 31, 2009, respectively. 13 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 both non-accruing and accruing loans for which 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 loan’s carrying value is not in excess of the fair value of the collateral or the present value of the loan’s 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 Company’s recorded investment in loans that are considered impaired totaled $3.2 million and $698,000 at December 31, 2010 and 2009, respectively. If all non-accrual loans had been current in accordance with their terms during the year ended December 31, 2010, 2009 and 2008, interest income on such loans would have amounted to $33,800, $65,300 and $85,800, respectively. At December 31, 2010, Rome Savings had no loans which were considered to be a “troubled debt restructuring”. 14 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, 2010, we increased our allowance for loan losses through a $1.8 million 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, $12.61 million in “potential problem loans” at December 31, 2010. Payments are current on $9.10 million or 72.14% 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 15 Savings will continue to be aggressive in identifying, monitoring and resolving potential problem loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Results of Operations for the Years Ended December 31, 2010 and December 31, 2009 - Provision for Loan Losses” included in the document. 16 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.
17 Investment Activities 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 Committee (ALCO) 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 also invests in privately insured state and municipal obligations with a maturity of fifteen years or less rated AAA by Moody’s, 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. 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. 18 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.
19 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, 2010.
20 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. 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 69.3% and 66.8% of total deposits on December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, time deposits with remaining terms to maturity of less than one year amounted to $48.8 million and $50.4 million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Analysis of Net Interest Income” for information relating to the average balances and costs of our deposit accounts for the years ended December 31, 2010, 2009 and 2008. At December 31, 2010, we had $17.0 million in time deposits with balances of $100,000 or more maturing as follows:
Borrowings. At December 31, 2010, we had outstanding borrowings of $35.7 million which were used to fund loans, 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 $61.2 million, all of which million remained available at December 31, 2010. The Company also had unused short term borrowing capacity at the Federal Reserve Bank of New York totaling $8.3 million which is collateralized by a portion of the consumer loan portfolio. Subsidiary Activities Rome Savings has four subsidiaries: 100 On the Mall Corporation, Clocktower Insurance Agency Incorporated, RSB Properties, Inc. and RSB Capital Inc. RSB Properties, Inc. is a real estate investment trust. 100 On the Mall, Clocktower Insurance and RSB Capital, Inc. are currently inactive. Employees At December 31, 2010, Rome Savings had 93 full-time employees and 7 part-time employees. Rome Savings’ employees are not represented by a collective bargaining agreement, and Rome Savings considers its relationship with its employees to be good. 21 REGULATION AND SUPERVISION General Rome Bancorp is regulated as a savings and loan holding company by the OTS. Rome Savings, as a federally-chartered savings bank, is subject to regulation, examination and supervision by the OTS, as its primary regulator, and the Federal Deposit Insurance Corporation (the “FDIC”), as its deposit insurer. Rome Savings must file reports with the OTS concerning its activities and financial condition. Rome Bancorp is also required to file reports with, and otherwise comply with, the rules and regulations of the OTS and of the SEC under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies or any other policies, including policies with respect to Rome Savings’ capital levels, classification of assets and establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC, the SEC or the United States Congress, could have a material adverse impact on Rome Bancorp, Rome Savings, and their operations and stockholders. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by the President on July 21, 2010 (the “Dodd-Frank Act”), provides for the regulation and supervision of federal savings associations like Rome Savings to be transferred to the Office of the Comptroller of the Currency (the “OCC”), the agency that regulates national banks. The OCC will assume primary responsibility for implementing and enforcing many of the laws and regulations applicable to federal savings associations. The transfer will occur over a transition period of up to one year, subject to a possible six month extension. At the same time, the responsibility for supervising savings and loan holding companies like Rome Bancorp will be transferred to the Federal Reserve Board. The Dodd-Frank Act also provides for the creation of a new agency, the Consumer Financial Protection Bureau, as an independent bureau of the Federal Reserve Board, to take over the implementation of federal consumer financial protection and fair lending laws from the depository institution regulators. However, institutions of $10 billion or fewer in assets will continue to be examined for compliance with such laws and regulations by, and subject to the enforcement authority of, the prudential regulator rather than the Consumer Financial Protection Bureau. The description of statutory provisions and regulations applicable to federally chartered savings associations and their holding companies and of tax matters set forth in this document does not purport to be a complete description of all such statutes and regulations and their effects on Rome Bancorp and Rome Savings. Recent Government Actions On July 21, 2010, President Obama signed the Dodd-Frank Act, which is legislation that restructures the regulation of depository institutions. In addition to eliminating the OTS and creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, requires changes in the way that institutions are assessed for deposit insurance, mandates the imposition of consolidated capital requirements on savings and loan holding companies, requires that originators of securitized loans retain a percentage of the risk for the transferred loans, reduces the federal preemption afforded to federal savings associations and contains a number of reforms related to mortgage origination. Many of the provisions of the Dodd-Frank Act require the issuance of regulations before their impact on operations can be assessed by management. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden and increase compliance and possibly interest expense costs for Rome Bancorp and Rome Savings. 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 OTS regulations. Under these laws and regulations, Rome Savings may invest in 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 and securities and brokerage activities. Rome Savings’ authority to make certain types of loans or other investments is limited by federal law and regulation. The Dodd-Frank Act authorizes depository institutions to pay interest on demand deposits effective July 31, 2011. Depending upon competitive responses, that change could have an adverse impact on Rome Savings’s interest expense. 22 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 federal law, 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” means, 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. Rome Savings met the QTL test at December 31, 2009, and in each of the prior 12 months, and therefore is a “qualified thrift lender.” 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. The Dodd-Frank Act also makes noncompliance with the qualified thrift lender test subject to agency enforcement action for a violation of law and a basis for dividend restrictions. 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 4.0%, 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 and certain other assets to 100% for consumer, commercial, home equity and construction loans and certain other assets, 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 stockholder’s equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangible assets (other than certain servicing rights and nonsecurity financial instruments) 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 supplementary 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. 23 At December 31, 2010, Rome Savings met and exceeded each of its capital requirements. The table below presents Rome Savings’ regulatory capital as compared to the OTS regulatory capital requirements at December 31, 2010:
Interest Rate Risk. The Federal Deposit Insurance Corporation Improvement Act requires that the OTS and other federal bank regulatory agencies (the “Agencies”) revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account IRR concentration of risk and the risks of non-traditional activities. The OTS regulations do not include a specific IRR component of the risk-based capital requirement. However, the OTS monitors the IRR of individual institutions through a variety of means, including an analysis of the change in net portfolio value, or NPV. NPV is defined as the net present value of the expected future cash flows of an entity’s assets and liabilities and, therefore, hypothetically represents the value of an institution’s net worth. In addition, OTS Thrift Bulletin 13a provides guidance on the management of IRR and the responsibility of boards of directors in that area. In January 2010, the Agencies released an Advisory on Interest Rate Risk Management (the “IRR Advisory”) to remind institutions of the supervisory expectations regarding sound practices for managing IRR. While some degree of IRR is inherent in the business of banking, the Agencies expect institutions to have sound risk management practices in place to measure, monitor and control IRR exposures, and IRR management should be an integral component of an institution’s risk management infrastructure. The Agencies expect all institutions to manage their IRR exposures using processes and systems commensurate with their earnings and capital levels, complexity, business model, risk profile and scope of operations, and the IRR Advisory reiterates the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the IRR exposures of institutions. The IRR Advisory encourages institutions to use a variety of techniques to measure IRR exposure, including simple maturity gap analysis, income measurement and valuation measurement for assessing the impact of changes in market rates, as well as simulation modeling to measure IRR exposure. Institutions are encouraged to use the full complement of analytical capabilities of their IRR simulation models. The IRR Advisory also reminds institutions that stress testing, which includes both scenario and sensitivity analysis, is an integral component of IRR management. The IRR Advisory indicates that institutions should regularly assess IRR exposures beyond typical industry conventions, including changes in rates of greater magnitude (e.g., up and down 300 and 400 basis points, as compared to up and down 200 basis points, which has been the general practice) across different tenors to reflect changing slopes and twists of the yield curve. The Company utilizes a simulation model to track liquidity, portfolio value and interest rate sensitivity of its financial instruments over a range of possible interest rate scenario. These results are reviewed at least quarterly by the company’s Asset Liability Committee, which includes certain members of the Company’s Board of Directors and Senior Management. Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), as implemented by OTS regulations, Rome Savings has a continuing and affirmative obligation, consistent with its safe and sound operation, to ascertain and 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 Rome Savings nor does it limit Rome Savings’ discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. Rather, the CRA requires the OTS, in connection with its examination of a federally chartered savings association, to assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA regulations rate an institution on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests: 24
The CRA also requires all institutions to make public disclosure of their CRA ratings. Rome Savings received a “Satisfactory” CRA rating in its most recent examination. Regulations require that Rome Savings publicly disclose certain agreements that are in fulfillment of CRA. There are no such agreements at this time. Transactions with Affiliates. Rome Savings’ authority to engage in transactions with its “affiliates” is limited by the Sections 23A and 23B of the Federal Reserve Act (the “FRA”) and Regulation W issued by the Federal Reserve Board, 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 currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O issued by 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 in excess of certain limits must be approved by Rome Savings’ Board of Directors. Enforcement. The OTS has primary enforcement responsibility over federally chartered 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 and to unsafe or unsound practices. Standards for Safety and Soundness. Pursuant to the Federal Deposit Insurance Act, 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 manage 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 25 may issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of federal law. 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. Limitation 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, including the proposed distribution, 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:
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 association’s capital:
At December 31, 2010, Rome Savings met the criteria for being considered “well-capitalized.” When appropriate, the OTS can require corrective action by a savings association holding company under the “prompt corrective action” provision of federal law. Insurance of Deposit Accounts. Rome Savings is a member of the Deposit Insurance Fund (“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 (“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. As a result of the recent failures of a number of banks and thrifts, there has been a significant increase in the loss provisions of the DIF of the FDIC. This has resulted in a decline in the DIF reserve ratio. Because the DIF reserve ratio declined below 1.15% the FDIC was required to establish a restoration plan to restore the reserve ratio to 1.15% within five years. In order to restore the reserve ratio to 1.15%, the FDIC increased risk-based assessment rates uniformly by 7 basis points (annualized) during the first quarter of 2009. Thereafter, the FDIC further increased the initial base assessment rates, beginning with the second quarter of 2009, depending on an institution’s risk category, with adjustments resulting in increased assessment rates for institutions with a significant reliance on secured liabilities and brokered deposits. In May of 2009 the FDIC imposed a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The special assessment was $142,000 for Rome Savings and was collected on September 30, 2009. On September 29, 2009, the FDIC adopted an amendment to the restoration plan that increases the deposit insurance 26 assessment rate schedule uniformly across all four risk categories by three basis points (annualized) of insured deposits beginning January 1, 2011. In addition, on November 17, 2009 the FDIC adopted a final rule which required insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessment for these periods was collected on December 30, 2009 and Rome Savings’ prepaid assessment was $752,000 which was recorded as a prepaid expense. The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Rome Savings. Management cannot predict what insurance assessment rates will be in the future. 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, 2009, the FDIC assessed DIF-insured deposits 1.06 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 through 2019. Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000. That limit was made permanent by the Dodd-Frank Act. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. The management of Rome Savings does not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Home Loan Bank System. Rome Savings is a member of 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, 2010 of $3.4 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. Under regulations of the Federal Reserve Board, Rome Savings is required to maintain noninterest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations exempt $10.7 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) from the reserve requirements. A 3% reserve is required for net transaction account balances between $10.7 million and $55.2 million (subject to adjustment by the Federal Reserve Board) plus a reserve requirement 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $55.2 million. Rome Savings is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of 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 the Bank’s 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. 27 Prohibitions Against Tying Arrangements. Federal savings associations are subject to prohibitions on certain tying arrangements. A depository institution is prohibited, subject to certain 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 product or service from the institution or its affiliates or not obtain services of a competitor of the institution. 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:
On July 26, 2010, Rome Savings stipulated and consented to a Cease and Desist Order (the “Order”) issued by the Office of Thrift Supervision. The Order became effective on July 26, 2010. The Order was issued as a result of weaknesses in Rome Savings’s Secrecy Act/Anti-Money Laundering (“BSA”) compliance program identified this year. The Order requires Rome Savings to cease and desist from violating certain BSA laws and regulation identified in the Order, revise its current BSA compliance program, implement a system of internal controls to ensure compliance with BSA laws and regulations and to take certain other actions identified by the Office of Thrift Supervision in the Order. Rome Savings believes that it has addressed all of the matters mentioned in the Order and has completed all of the actions required to be taken by the deadline dates stated in the Order. The Order will not have a material impact on the financial condition or results of operations of Rome Savings or Rome Bancorp. 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 Control’s list of Specially Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The Office of Foreign Asset Control issued guidance directed at financial institutions in which it asserted 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. 28 Regulation of Savings and Loan Holding Companies 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. In general, a savings and loan holding company, with the prior approval of the OTS, may engage in all activities that bank holding companies may engage in under any regulation that the Federal Reserve Board has promulgated under Section 4(c) of the BHC Act. Current regulations limit such authority to those activities that the Federal Reserve Board has, by regulation, determined to be permissible under Section 4(c)(8) of the BHC Act, as noted below. Prior approval from the OTS is not required, however, if: (1) the savings and loan holding company received a rating of satisfactory or above prior to January 1, 2008, or a composite rating of “1” or “2” thereafter, in its most recent examination, and its not in troubled condition, and the holding company does not propose to commence the activity by an acquisition of a going concern, or (2) the activity is otherwise permissible under another provision of HOLA, for which prior notice to or approval from the OTS is not required. In addition, a savings and loan holding company is precluded from acquiring more than 5% of a non-subsidiary thrift unless the savings and loan holding company receives prior approval from the OTS. No savings and loan holding company may, directly or indirectly, or through one or more subsidiaries or through one or more transactions, acquire control of an uninsured institution or retain, for more than one year after the date any savings association subsidiary becomes uninsured, control of such association. Because Rome Bancorp was organized after May 4, 1999, under the Gramm Leach Bliley Act of 1999 (the “GLB Act”) it is prohibited from engaging in non-financial activities. Unitary savings and loan holding companies that existed before this date and that have not undergone certain reorganization or restructuring transactions are “grandfathered” under the GLB Act and generally have no restrictions on their business activities. Rome Bancorp’s activities, however, are restricted to:
29
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.” Consolidated Holding Company Capital Requirements. Unlike bank holding companies, federal savings and loan holding companies are not currently subject to any regulatory capital requirements or to supervision by the Federal Reserve Board. The Dodd-Frank Act requires the federal banking agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies. These requirements must be no less than those to which insured depository institutions are currently subject, and the new requirements will effectively eliminate the use of trust preferred securities as a component of Tier 1 capital for depository institution holding companies of our size. As a result, not later than the fifth anniversary of the effective date of the Dodd-Frank Act, the Company will become subject to consolidated capital requirements to which it has not been subject to previously. The Sarbanes-Oxley Act. As a public company, Rome Bancorp is subject to the Sarbanes-Oxley Act of 2002, 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 Act’s principal legislation and the derivative regulation and rule making promulgated by the SEC includes:
30
Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of personal loans to directors and executive officers of issuers. 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 Federal Reserve Act. Although Rome Bancorp anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on its results of operations or financial condition. Federal Securities Laws. Rome Bancorp’s common stock is registered with the SEC under Section 12(b) of the Exchange Act. Rome Bancorp is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Quotation on Nasdaq. Rome Bancorp’s common stock is quoted on The Nasdaq Global Market. In order to maintain such quotation, Rome Bancorp is subject to certain corporate governance requirements, including:
31
We conduct our business through our executive office, operations center, which includes both the Mortgage Center and the Accounting Center listed below, and four banking offices. In addition, we have purchased land in Oneida, New York for potential expansion into that market. At December 31, 2010, the net book value of the computer equipment and other furniture, fixtures and equipment of Rome Savings and Rome Bancorp at their offices totaled $724,000. For more information, see Note 5 of Notes to Consolidated Financial Statements.
On October 18, 2010, Stephen Bushansky filed a stockholder class action lawsuit in the Supreme Court of the State of New York, County of the Bronx, on October 27, 2010, James and Liliana DiCastro filed a stockholder class action lawsuit in the Chancery Court of the State of Delaware, and on November 15, 2010, and Samuel S. Rapasodi filed a stockholder class action lawsuit in the Supreme Court of the State of New York, County of Oneida, each against Rome Bancorp, Berkshire Hills, and the directors of Rome Bancorp. The lawsuit filed in Delaware was subsequently withdrawn voluntarily. The Bushansky and Rapasodi lawsuits purported to be brought on behalf of all of Rome Bancorp’s public stockholders and alleged that the directors of Rome Bancorp breached their fiduciary duties to Rome Bancorp’s stockholders by failing to take steps necessary to obtain a fair and adequate price for Rome Bancorp’s common stock and that Berkshire Hills knowingly aided and abetted Rome Bancorp directors’ breach of fiduciary duty. On February 23, 2011, solely to avoid the costs, risks and uncertainties inherent in litigation and to allow stockholders to vote on the proposals required in connection with the merger at the scheduled meeting, Rome Bancorp entered into a memorandum of understanding with plaintiffs’ counsel and other named defendants regarding the settlement of two putative class action lawsuits filed in the Supreme Court of the State of New York, County of the Bronx and the Supreme Court of the State of New York, County of Oneida on behalf of Rome Bancorp’s stockholders following the public announcement of the execution of the merger agreement with Berkshire (the “Merger Agreement”). Under the terms of the memorandum negotiated by Rome Bancorp, Rome Bancorp, the other named defendants and the plaintiffs have agreed to settle the two lawsuits subject to court approval. If the court approves the settlement contemplated in the memorandum, the lawsuits will be dismissed with prejudice. Pursuant to the terms of the 32 memorandum, Rome Bancorp agreed to make available additional information to its stockholders in a Current Report on Form 8-K filed with the Commission on February 23, 2011. In return, the plaintiffs agreed to the dismissal of the lawsuits and to withdraw all motions filed in connection with such lawsuits. In connection with the settlement, plaintiffs intend to seek an award of attorneys’ fees and expenses not to exceed $395,000, subject to court approval. Rome Bancorp and its insurance carrier have agreed to pay the legal fees and expenses of plaintiffs’ counsel, in an amount not to exceed $395,000 and ultimately to be determined by the court. This payment will not affect the amount of merger consideration to be paid in the merger. If the settlement is finally approved by the court, it is anticipated that it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the proposed merger, the Merger Agreement, and any disclosure made in connection therewith (but excluding claims for appraisal under Section 262 of the Delaware General Corporation Law). There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated. The details of the settlement will be set forth in a notice to be sent to Rome Bancorp’s stockholders prior to a hearing before the court to consider both the settlement and plaintiffs’ fee application. The settlement will not affect the merger consideration to be paid to stockholders of Rome Bancorp in connection with the proposed merger between Rome Bancorp and Berkshire. Rome Bancorp and the other defendants deny all of the allegations in the lawsuits and believe the disclosures are appropriate under the law. Nevertheless, Rome Bancorp and the other defendants have agreed to settle the putative class action litigation in order to avoid costly litigation and reduce the risk of any delay to the closing of the merger. Rome Bancorp and the other defendants have vigorously denied, and continue to vigorously deny, that they have committed or aided and abetted in the commission of any violation of law or engaged in any of the wrongful acts that were or could have been alleged in the lawsuits, and expressly maintain that, to the extent applicable, they diligently and scrupulously complied with their fiduciary and other legal burdens and are entering into the contemplated settlement solely to eliminate the burden and expense of further litigation, to put the claims that were or could have been asserted to rest, and to avoid any possible delay in the consummation of the merger. Nothing in the Company’s Exchange Act reports, the Memorandum of Understanding or any stipulation of settlement shall be deemed an admission of the legal necessity or materiality under applicable laws of any of the disclosures set forth herein. As of the date of this Annual Report on Form 10-K, the Company is not involved in any other pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Company believes believe that these routine legal proceedings, in the aggregate, are immaterial to its financial condition and results of operations. 33 PART II
Rome Bancorp’s common stock is traded on the Nasdaq Global Market under the symbol “ROME”. At December 31, 2010, the last trading date in Rome Bancorp’s fiscal year, the common stock of Rome Bancorp closed at $12.02 per share. At March 2, 2011, there were 6,777,551 shares of Rome Bancorp’s common stock outstanding, which were held of record by approximately 1,500 registered shareholders. The table below shows the high and low sales price of Rome Bancorp’s common stock during the periods indicated.
Rome Bancorp paid cash dividends of $0.36 per share in 2010. Rome Bancorp also paid a 2011 quarterly cash dividend of $0.09 per share to shareholders of record as of February 4, 2011. Our ability to pay dividends depends on a number of factors including:
We do not guarantee that we will pay dividends, or that we will not reduce or eliminate dividends in the future. 34 Stock Price Performance Graph
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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 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. General Rome Bancorp commenced operations on October 6, 1999, when Rome Savings converted from a New York mutual savings bank to a New York mutual holding company structure whereby Rome Savings became a wholly-owned subsidiary of Rome Bancorp, a majority owned subsidiary of Rome, MHC. On April 27, 2004, Rome Savings converted from a New York-chartered savings bank regulated by the New York State Banking Department and the FDIC to a federal savings bank regulated by the OTS. On March 30, 2005, Rome, MHC converted from mutual to stock form (the “Conversion”). In connection with the Conversion, the 61.5% of outstanding shares of Rome Bancorp common stock owned by Rome, MHC were sold to depositors of Rome Savings and the public (the “Offering”). Following the completion of the Conversion and Offering, Rome Bancorp was succeeded by a new, fully public, Delaware corporation with the same name and Rome, MHC ceased to exist. On October 12, 2010, Berkshire Hills Bancorp, Inc., the parent company of Berkshire Bank, and the Company entered into an Agreement and Plan of Merger pursuant to which the Company will merge with and into Berkshire Hills Bancorp, Inc. Concurrent with the merger, it is expected that the Bank will merge with and into Berkshire Bank. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of the Company, and is currently expected to be completed on or about April 1, 2011. Rome Bancorp’s sole business is conducted by its wholly-owned subsidiary, Rome Savings. Rome Savings’ principal business is accepting deposits from the general public and using those deposits to make residential and commercial real estate loans, as well as commercial and consumer loans to individuals and small businesses primarily in Oneida County and also elsewhere in New York State. Rome Savings also invests in long and short-term marketable securities and other liquid investments. 2010 Highlights and Overview The following discussion focuses on the factors affecting the consolidated financial condition of Rome Bancorp as of the two years ended December 31, 2010 and 2009 and Rome Bancorp’s results of operations for the three years ended December 31, 2010. The consolidated financial statements and related notes for the three years ended December 31, 2010 should be read in conjunction with this review. The preparation of consolidated financial statements requires management to make estimates and assumptions. Changes in these estimates and assumptions affect the reported amounts of certain assets, liabilities, revenue and expenses. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. Rome Savings’ results of operations depend primarily on its net interest income, which is the difference between the 38 interest income it earns on its loans and investments and the interest it pays on its deposits and other interest-bearing liabilities. Net interest income is affected by the relative amounts of interest-bearing assets and interest-bearing liabilities and the interest rates earned or paid on these balances. Rome Savings’ operations are also affected by non-interest income, such as service fees and gains and losses on sales of securities and loans, the provision for loan losses and non-interest expense such as salaries and employee benefits, occupancy costs, and other general and administrative expenses. Financial institutions in general, including Rome Savings, are significantly affected by economic conditions, competition and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions and fund availability. Rome Savings’ operations and lending are principally concentrated in the Central New York area, and therefore its operations and earnings are influenced by the economics of the area it operates in. Deposit balances and cost of funds are influenced by prevailing market rates on competing investments, customer preferences and levels of personal income and savings in Rome Savings’ primary market area. Net income for 2010 decreased to $2.3 million compared to $3.1 million in the prior year. The significant factors and trends impacting 2010, which are discussed in greater depth below, were as follows:
Critical Accounting Policies It is management’s opinion that accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making these estimates. Management of Rome Bancorp considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required for probable incurred credit losses and the material effect that such judgments can have on the results of operations. Management’s quarterly evaluation of the adequacy of the allowance considers Rome Bancorp’s historical loan loss experience, review of specific loans, current economic conditions and such other factors considered appropriate to estimate losses. Management uses presently available information to estimate probable incurred losses on loans; however, future additions to the allowance may be necessary based on changes in estimates, assumptions or economic conditions. Significant factors that could give rise to changes in these estimates include, but are not limited to, changes in economic conditions in the local area, concentrations of risk and declines of local property values. Management also considers the accounting policy relating to the impairment of long lived assets to be a critical accounting policy due to the subjectivity and judgment involved and the material effect an impairment loss could have on the results of operations. A decline in the fair value of a long lived asset below cost that is deemed to be other than temporary is charged to earnings resulting in the establishment of a new cost basis for the asset. Management continually reviews the current value of its long lived assets for evidence of other than temporary impairment. These critical policies and their application are reviewed periodically by the Audit Committee and the Board of Directors. All accounting policies are important, and as such, we encourage the reader to review each of the policies included in the notes to the Consolidated Financial Statements to obtain a better understanding of how our financial performance is reported. 39 Management of Interest Rate Risk Interest rate risk is the most significant market risk affecting Rome Bancorp. Other types of market risk, such as movements in foreign currency exchange rates and commodity prices, do not arise in the normal course of Rome Bancorp’s business operations. Interest rate risk can be defined as an exposure to a movement in interest rates that could have an adverse effect on Rome Bancorp’s net interest income. Interest rate risk arises naturally from the imbalance in the repricing, maturity, and/or cash flow characteristics of assets and liabilities. In periods of falling interest rates, prepayments of loans typically increase, which would lead to reduced net interest income if such proceeds could not be reinvested at a comparable spread. Also in a falling rate environment, certain categories of deposits may reach a point where market forces prevent further reduction in the interest rate paid on those instruments. Generally, during extended periods when short-term and long-term interest rates are relatively close, a flat yield curve may lead to smaller net interest margins thereby reducing net interest income. The net effect of these circumstances is reduced interest income, offset only by a nominal decrease in interest expense, thereby narrowing the net interest margin. Managing interest rate risk is of primary importance to Rome Bancorp. The responsibility for interest rate risk management is the function of Rome Bancorp’s ALCO, which includes the President and Chief Executive Officer, Executive Vice President and Chief Financial Officer, Vice President and Controller, other members of Senior Management and certain members of Rome Bancorp’s Board of Directors. Rome Bancorp’s ALCO meets at least quarterly to review Rome Bancorp’s asset/liability policies and identify and measure potential risks to earnings due to changes in interest rates. The primary goal of Rome Bancorp’s interest rate risk management is to minimize the potential loss in net interest income that could arise from changes in interest rates. A simulation model is the primary tool used to assess the impact of changes in interest rates on net interest income. Key assumptions used in the model include prepayment speeds on loans and mortgage-backed securities, loan volumes and pricing and customer preferences, and sensitivity to changing rates. These assumptions are compared to actual results and revised as necessary. Rome Bancorp’s analysis compares net interest income under a scenario of no change from current interest rates with one of a 100, 200 and 300 basis point increase in interest rates and one of a 100 basis point decrease in rates. The change in interest rates is assumed to occur in the first twelve months following the current financial statement date. Net interest income is measured for each of the three forecasted twelve-month periods following the balance sheet date. Rome Bancorp’s policy is that net interest income should not vary by more than 20% for each of the three forecasted twelve-month periods. At December 31, 2010, based on simulation model results, Rome Bancorp was within these guidelines. 40 The following table sets forth at December 31, 2010 and 2009 the estimated percentage and dollar change in Rome Bancorp’s net interest income resulting from changes in interest rates over a one year period. Certain assumptions have been made in preparing the table below. Although management believes these assumptions to be reasonable, the interest rate sensitivity of assets and liabilities and the estimated effects of changes in interest rates on net interest income indicated in the following table could vary substantially if different assumptions were used or if actual experience differs from such assumptions.
The above table reflects that as of both December 31, 2010 and 2009, Rome Bancorp had a relatively low risk of volatility in net interest income due to interest rate fluctuations. The interest rate risk modeled as of December 31, 2010 exhibited positive variances in periods of rising interest rates and a negative variance in a model depicting decreasing interest rates. In the upward rate environments, the most immediate interest rate risk lies with the Company’s $69.2 million of time deposits, a portion of which will reprice upwards during the period in relation to changes in prevailing interest rates. However, in the simulation of a 100 basis point decrease in rates, the decrease in net interest income is primarily attributable to assumed reductions in the rates on the Company’s loan portfolio which would not be entirely offset by the cost decreases on interest bearing liabilities. 41 Analysis of Net Interest Income Average Balances, Interest and Average Yields. The following table sets forth certain information relating to Rome Bancorp’s average balance sheets and reflects the average yield on interest-earnings assets and average cost of interest-bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for loan losses, but include non-accrual loans. Interest income on securities includes a tax equivalent adjustment for bank qualified municipals.
42 Rate Volume Analysis. The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It shows the amount of the change in interest income or expense caused by either changes in outstanding balances (volume) or changes in interest rates. The effect of a change in volume is measured by applying the average rate during the first period to the volume change between the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period. Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the absolute value of the change due to volume and the change due to rate.
Comparison of Financial Condition at December 31, 2010 and December 31, 2009 Rome Bancorp’s total assets at December 31, 2010 were $327.2 million, a decrease of $2.7 million from $329.9 million at December 31, 2009. The majority of this decrease was attributable to contraction of the Company’s loan portfolio. Cash and cash equivalents increased to $18.8 million at December 31, 2010 from $7.6 million a year earlier due to deposit inflows and the proceeds from sales of mortgages originated. Securities available for sale were $13.1 million at December 31, 2010, an increase of $3.1 million from $10.0 million at December 31, 2009. This increase was due to the purchase of ten bonds, partially offset by sales, principal reductions and maturities in the existing securities portfolio. Total gross loans decreased by $19.3 million, or 6.7%, to $268.4 million at December 31, 2010 from $287.7 million at December 31, 2009. During the year ended December 31, 2010, Rome Bancorp originated approximately $56.9 million of loans. The Company’s residential mortgage loan portfolio, decreased by $13.8 million, or 8.7%, primarily due to the sale of the majority of the Company’s 2010 originations of thirty year termed fixed-rate mortgages into the secondary market. The decision to sell these originations was made to control potential interest rate risk in periods of future rising interest rates. The Company’s non-performing loans as a percentage of total loans increased to 1.13% at December 31, 2010 as compared to 0.67% at December 31, 2009, primarily due to increased delinquencies and decreased loan balances. The allowance for loan losses as a percent of non-performing loans decreased to 81.9% at December 31, 2010, from 111.4% at December 31, 2009. 43 Total deposits increased by $8.7 million or 4.0% from $216.6 million at December 31, 2009 to $225.3 million at December 31, 2010, as depositors chose insured bank deposit accounts over other available investments. The Company recorded growth in all deposit categories except for time deposits, which declined by $2.7 million, or 3.8%. Money market balances grew by $3.8 million, or 24.1%, in 2010, increasing from $15.7 million at December 31, 2009 to $19.5 million at December 31, 2010. Non-interest bearing deposits increased by $2.7 million, or 8.5%, over the past year. Savings deposits increased $3.2 million from $82.0 million at December 31, 2009 to $85.2 million at December 31, 2010. Other interest bearing deposits increased by $1.7 million, or 11.2%, from $15.2 million at December 31, 2009 to $16.9 million at year end 2010. Comparison of Results of Operations for the Years Ended December 31, 2010 and December 31, 2009 General. Net income for the year ended December 31, 2010 decreased to $2.3 million from $3.1 million for the year ended December 31, 2009. The decrease in net income was attributable to an increase the provision for loan losses of $1.5 million and an increase in non-interest expense of $1.2 million which were partially offset by increases in net interest income before provision for loan losses and non-interest income of $629,000 and $828,000 respectively and a decrease in income tax expense of $385,000. Net Interest Income. The Company recorded net interest income before provision for loan losses of $13.7 million in 2010 and $13.0 million in 2009. The changes in the components of net interest income are discussed in detail below. Interest Income. Interest income decreased by $604,000 for the year ended December 31, 2010, from $17.3 million for the year ended December 31, 2009. Interest income earned on the loan portfolio decreased to $16.0 million in 2010 from $16.8 million in 2009. Average balances of the loan portfolio declined to $279.4 million in 2010 from $289.0 million in 2009, primarily due to the continued sale of the Company’s residential mortgage originations into the secondary market. The yield on loans in 2010 decreased to 5.72% compared to 5.80% in 2009 concurrent with the decline in overall underlying interest rates. Interest and dividend income on securities increased in 2010 primarily due to growth in the available for sale portfolio. Average securities increased to $16.3 million in 2010 from $11.6 million in 2009 while their tax equivalent yields decreased to 4.38% from 4.58% over the same period. Interest income of other short-term investments, including federal funds sold, dropped from $11,000 in 2009 to $8,000 in 2010. Interest Expense. Interest expense decreased to $3.0 million in 2010 from $4.3 million in 2009 due to decreases in both the average balances of outstanding interest bearing liabilities and the cost of those funds. Interest expense on borrowings decreased from $1.8 million in 2009 to $1.2 million in 2010 as the average balances decreased from $56.2 million in 2009 to $39.0 million in the current year. The Company utilized deposit inflows and loan sale proceeds to reduce fixed rate advances upon maturity. The average rate paid on borrowings decreased to 3.06% in 2010 from 3.25% in 2009. The average rate paid on interest bearing deposits in 2010 decreased to 0.97% from 1.32% in 2009, principally due to lower rates paid on time deposits, consistent with current market trends. The average balance of interest bearing deposits increased to $189.1 million in 2010 from $183.7 million in 2009. Provision for Loan Losses. The Company recorded a provision for loan losses of $1.8 million in 2010, compared to $300,000 in 2009. The majority of the loan loss provision is attributable to the decline in collateral value securing one commercial credit facility and the charge-off of a large commercial credit in the fourth quarter of 2010. This charge-off was necessitated by deterioration late in 2010 of the borrower’s financial position, raising uncertainty as to the source of loan repayment. Management is continuing to closely monitor these credits. In addition, the balance of non-performing loans increased in 2010. The majority of the non-performing loans are in the mortgage portfolio and management believes these loans are generally well collateralized. The allowance for loan losses increased to $2.5 million or 0.93% of total loans at December 31, 2010 compared to $2.1 million and 0.74% of total loans at December 31, 2009. The allowance for loan losses as a percent of non-performing loans decreased to 81.9% at December 31, 2010 from 111.4% at December 31, 2009. Management considers these ratios to be appropriate due to the current composition of the loan portfolio and level of non-performing loans. Non-performing loans, consisting of non-accrual loans and loans 90 days past due and still accruing, were $3.0 million or 1.13% of total loans at December 31, 2010 compared to $1.9 million or 0.67% at December 31, 2009. Rome Savings does not originate or hold subprime mortgage loans or securities collateralized by subprime loans. 44 In determining the level of the provision for loan losses necessary to absorb probable incurred credit losses, management considers historical loan loss experience, review of specific loans, the level of and trend in non-performing loans, the level of and trend in net loan charge-offs, the dollar amount and mix of the loan portfolio, as well as general economic conditions and real estate trends in Rome Bancorp’s market area, which can impact the inherent risk of loss in Rome Bancorp’s loan portfolio. As a result of these factors, management determined that a provision of $1.8 million was appropriate in 2010. Non-Interest Income. The following table summarizes changes in the major components of non-interest income:
Non-interest income increased $828,000 to $3.4 million in 2010 from $2.5 million in 2009. During 2010, the Company sold six investment securities, yielding gains of $156,000; in 2009, two investments were sold at a total gain of $73,000. Also, in 2010, the Company sold a commercial real estate parcel adjacent to one of its branch locations at a gain of $419,000. The increase in gains realized on loan sales represents an increase in both the volume of loans sold and the average gain per sale. Service charge income increased commensurate with deposit and loan activity. The decrease in other income is primarily attributable to the loss of rental income on the aforementioned commercial real estate parcel sold. Non-Interest Expense. Non-interest expense increased to $11.9 million for the year ended December 31, 2010 compared to $10.7 million for the year ended December 31, 2009. The following table summarizes changes in the major components of non-interest expense:
The increase in 2010 salaries and employee benefits expense is principally due to higher costs related to stock-based benefit plans, which increased directly with increases in the Company’s average stock price throughout 2010. The current year decline in regulatory assessment rates reflects the special assessment charged in 2009 to all banks insured by the FDIC. The 2010 increase in outside consulting and professional fees is the result of costs incurred by the Company for strategic planning activities, culminating with the impending merger with Berkshire Hills Bancorp, Inc., as discussed in Note 20 of the Notes to the Consolidated Financial Statements. Major components of the increase in other expenses were in the areas of advertising, loan operations expense and insurance expense. Income Tax Expense. Income tax expense decreased to $1.1 million for 2010 from 2009 income tax expense of $1.5 million. The decrease is attributable to lower pre-tax earnings, partially offset by the nondeductible nature of some acquisition costs incurred. Comparison of Results of Operations for the Years Ended December 31, 2009 and December 31, 2008 General. Net income for the year ended December 31, 2009 increased to $3.1 million from $2.9 million for the year ended December 31, 2008. The increase in net income was attributable to an increase in non-interest income of $578,000, partially offset by a decrease in net interest income before provision for loan losses of $26,000, and increases in non-interest expense and income tax expense of $279,000 and $91,000, respectively. 45 Net Interest Income. The Company recorded net interest income of $13.0 million in 2009 and $13.1 million in 2008. The changes in the components of net interest income are discussed in detail below. Interest Income. Interest income decreased by $663,000 for the year ended December 31, 2009, from $18.0 million for the year ended December 31, 2008. Interest income earned on the loan portfolio decreased to $16.8 million in 2009 from $17.6 million in 2008. Average balances of the loan portfolio remained constant at approximately $289 million in both 2009 and 2008. The yield on loans in 2009 decreased to 5.80% compared to 6.08% in 2008 concurrent with the decline in overall underlying interest rates. Interest and dividend income on securities increased in 2009 primarily due to growth in the available for sale portfolio. Average securities increased to $11.6 million in 2009 from $7.5 million in 2008 while their tax equivalent yields decreased to 4.58% from 5.24% over the same period. Interest income of other short-term investments, including federal funds sold, dropped from $26,000 in 2008 to $11,000 in 2009, as a result of a decrease in the yield earned on these funds, again driven by declines in market interest rates throughout latter 2008 and into 2009. Interest Expense. Interest expense decreased to $4.3 million in 2009 from $4.9 million in 2008 primarily due to a decrease in the cost of funds, consistent with current market trends, partially offset by increases in the average balances of outstanding borrowings and deposits. Interest expense on borrowings increased from $1.5 million in 2008 to $1.8 million in 2009 as the average balances increased from $50.7 million in 2008 to $56.2 million in 2009. The average rate paid on these borrowings increased to 3.25% in 2009 from 3.04% in 2008, as the Company restructured its floating rate debt into longer term fixed-rate maturities in order to take advantage of the historically low interest rate levels. The average rate paid on interest bearing deposits in 2009 decreased to 1.32% from 1.89% in 2008, principally due to lower rates paid on time deposits and savings accounts. Provision for Loan Losses. The Company recorded a provision for loan losses of $300,000 in both 2009 and 2008. While the level of non-performing loans has increased in 2009, the Company had a reduction in its actual loan losses from 2008 levels. Net loan charge-offs decreased to $104,000 in 2009 from $274,000 in the prior year. The allowance for loan losses increased to $2.1 million or 0.74% of total loans at December 31, 2009 compared to $1.9 million and 0.64% of total loans at December 31, 2008. The allowance for loan losses as a percent of non-performing loans decreased to 111.4% at December 31, 2009 compared to 152.1% at December 31, 2008. Management considered these ratios to be appropriate due to the composition of the loan portfolio and level of non-performing loans. Non-performing loans, consisting of non-accrual loans and loans 90 days past due and still accruing, were $1.9 million or 0.67% of total loans at December 31, 2009 compared to $1.3 million or 0.42% at December 31, 2008. In determining the level of the provision for loan losses necessary to absorb probable incurred credit losses, management considers historical loan loss experience, review of specific loans, the level of and trend in non-performing loans, the level of and trend in net loan charge-offs, the dollar amount and mix of the loan portfolio, as well as general economic conditions and real estate trends in Rome Bancorp’s market area, which can impact the inherent risk of loss in Rome Bancorp’s loan portfolio. As a result of these factors, management determined that a provision of $300,000 was appropriate in 2009. 46 Non-Interest Income. The following table summarizes changes in the major components of non-interest income:
Non-interest income increased $578,000 to $2.5 million in 2009 from $1.9 million in 2008. During 2009, the Company sold two investment securities, yielding gains of $73,000; no investments were sold in 2008. In contrast, in 2008, in relation to declines in global investment markets, the Company recognized a write-down of $265,000 on its investment in a large blue chip mutual fund, due to impairment that was determined to be “other than temporary” under generally accepted accounting principles. In light of the low interest rate environment existent in 2009, the Company opted to sell the majority of its current year fixed-rate thirty year termed residential mortgage originations into the secondary market. Loan sales increased to $11.2 million in 2009, compared to $1.2 million in 2008, accounting for the increase in gains on loan sales. Service charge income increased commensurate with deposit and loan activity. Non-Interest Expense. Non-interest expense increased to $10.7 million for the year ended December 31, 2009 compared to $10.4 million for the year ended December 31, 2008. The following table summarizes changes in the major components of non-interest expense:
The increase in salaries and employee benefits is largely related to higher defined benefit pension plan expense resulting from a 2008 decline in the market value of plan assets. Due to overall higher assessment rates charged to all banks insured by the FDIC, as well as a special assessment, the Company’s FDIC and regulatory assessment expense increased to $416,000 in 2009 from $140,000 in the prior year. In 2009 the Company required less legal, professional and consulting services. Major components of the decrease in other expenses were in the areas of other real estate owned and contribution expense. Due to a reduction in other real estate owned during 2009, the Company’s expense decreased by $98,000 to $10,000 in 2009. Contribution expense decreased from $151,000 in 2008 to $17,000 in 2009 due to the 2008 donation of a parcel of Company owned real estate to the Rome Rescue Mission, Inc. Income Tax Expense. Income tax expense was $1.5 million for 2009, an increase of $91,000 from 2008 income tax expense of $1.4 million. The increase is attributable to higher pre-tax earnings. Liquidity and Capital Resources Liquidity describes our ability to meet the financial obligations that arise during the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Rome Bancorp’s primary sources of funds consist of deposits, scheduled amortization and prepayments of loans and mortgage-backed securities, maturities and sales of investments, interest bearing deposits at other financial institutions and funds provided from operations. Rome Savings also has a written agreement with the Federal Home Loan Bank of New York that allows it to borrow up to $61.2 million on a line of credit. At December 31, 2010, Rome Savings had no outstanding borrowings against this line of credit, but did have bullet maturity and amortizing notes totaling $35.7 million. At December 31, 2010, the Company also had approximately $8.3 million in unused short term borrowing capacity at the Federal Reserve Bank of New York. 47 Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions, and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Rome Bancorp’s primary investing activities include the origination of loans and to a lesser extent the purchase of investment securities. In 2010, Rome Bancorp originated approximately $56.9 million in loans compared to approximately $51.5 million in 2009. Purchases of investment securities were $5.6 million in 2010 and $7.5 million in 2009. At December 31, 2010, Rome Bancorp had loan commitments to borrowers of approximately $13.3 million, and customer available letters and lines of credit of approximately $18.6 million. Total deposits were $225.3 million at December 31, 2010, an increase of 4.0% from $216.6 million at December 31, 2009. Time deposit accounts scheduled to mature within one year were $48.8 million at December 31, 2010. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain with Rome Bancorp. We are committed to maintaining a strong liquidity position therefore, Rome Bancorp monitors its liquidity position on a daily basis. Rome Bancorp anticipates that it will have sufficient funds to meet its current funding commitments. The marginal cost of new funding however, whether from deposits or from borrowings from the Federal Home Loan Bank, will be carefully considered as Rome Bancorp monitors its liquidity needs. Therefore, in order to minimize its cost of funds, Rome Bancorp may consider additional borrowings from the Federal Home Loan Bank in the future. During 2010 Rome Bancorp repurchased 22,568 outstanding shares of its common stock at a total cost of $201,000. Rome Bancorp paid cash dividends of $0.36 per share in 2010, requiring a cash outlay of $2.3 million. At December 31, 2010 and 2009, Rome Savings exceeded each of the applicable regulatory capital requirements. Rome Savings’ leverage (Tier 1) capital at December 31, 2010 and 2009 was $57.8 million and $54.0 million or 17.57% and 16.27% of adjusted assets, respectively. In order to be classified as “well-capitalized” by the OTS and the FDIC at December 31, 2010 and 2009, Rome Savings was required to have leverage (Tier 1) capital of $16.5 million and $16.6 million, respectively, or 5.0% of adjusted assets. To be classified as a “well-capitalized” bank by the OTS and FDIC, Rome Savings must also have a risk-based total capital ratio of 10.0%. At December 31, 2010 and 2009, Rome Savings had a risk-based total capital ratio of 25.41% and 23.04%, respectively. Rome Bancorp does not anticipate any material capital expenditures, nor does it have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than debt as described in Note 7 of Notes to the Consolidated Financial Statements and the commitments and unused lines and letters of credit noted above. Off-Balance Sheet Arrangements Rome Bancorp does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on Rome Bancorp’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Recently Adopted Accounting Pronouncements In June 2009, FASB issued Accounting Standard Update (“ASU”) Number 2009-16, “Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140.” The new accounting requirement amends previous guidance relating to the transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This statement must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this statement were also amended and apply to transfers that occurred both before and after the effective date of this statement. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. 48 ASC Topic 810-10-65-2, “Amendments to FASB Interpretation No. 46(R),” which amended guidance for consolidation of variable interest entities by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity of (2) the right to receive benefits from the entity. This statement also requires additional disclosures about an enterprise’s involvement in variable interest entities. This statement became effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is prohibited. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. On July 21, 2010, the FASB issued ASU No 2010-20,”Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, which credit quality information, impaired financing receivables and non-accrual status are to be presented by class of financing receivable. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods on or after December 15, 2010. See Note 4 to the Notes to the Financial Statements – Loans. In January 2011, FASB issued Accounting Standards Update No 2011-11, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.
The information is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Management of Interest Rate Risk.” 49
Rome Bancorp, Inc and Subsidiary 50 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of
Directors We have audited the accompanying consolidated balance sheets of Rome Bancorp, Inc. and subsidiary as of December 31, 2010 and 2009 and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rome Bancorp, Inc. and subsidiary as of December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
51 ROME BANCORP, INC. AND SUBSIDIARY December 31, 2010 and 2009 (In thousands, except share data)
See accompanying notes to consolidated financial statements. 52 ROME BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income Years ended December 31, 2010, 2009 and 2008 (In thousands, except share data)
See accompanying notes to consolidated financial statements. 53 ROME BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Shareholders’ Equity and Comprehensive Income Years ended December 31, 2010, 2009 and 2008 (In thousands, except share data)
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