10-K 1 f10k_123112-0375.htm FORM 10-K 12-31-12 ROMA FINANCIAL CORP. f10k_123112-0375.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2012
- OR -
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________________ to _______________________________

Commission File Number: 000-52000

ROMA FINANCIAL CORPORATION
(Exact name of Registrant as specified in its Charter)

United States
 
51-0533946
(State or other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

2300 Route 33, Robbinsville, New Jersey
   
08691
 
(Address of Principal Executive Offices)
   
(Zip Code)
 

Registrant’s telephone number, including area code: (609) 223-8300

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.10 par value
 
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o YES  x NO
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o YES   x NO
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x YES   o NO
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  x YES   o NO
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,  a non-accelerated filer, or a smaller reporting company. See the 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 x
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  o YES   x NO
 
The aggregate market value of the voting and non-voting equity held by non-affiliates of the Registrant on June 29, 2012 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $84.2 million.

As of February 25, 2013 there were 30,116,769 shares of common stock outstanding.
 
 
 

 
PART I

Forward-Looking Statements

Roma Financial Corporation (the “Company” or “Registrant”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control). In addition to the Risk Factors described in Item 1A, the following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: The strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; market volatility; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Item 1. Business

General

The Company is a federally-chartered corporation organized in January 2005 for the purpose of acquiring all of the capital stock that Roma Bank issued in its mutual holding company reorganization. Roma Financial Corporation’s principal executive offices are located at 2300 Route 33, Robbinsville, New Jersey 08691 and its telephone number at that address is (609) 223-8300.

Roma Financial Corporation, MHC (the “MHC”) is a federally-chartered mutual holding company that was formed in January 2005 in connection with the mutual holding company reorganization. The MHC has not engaged in any significant business since its formation. So long as Roma Financial Corporation MHC is in existence, it will at all times own a majority of the outstanding stock of the Company.  The MHC and the Company are now regulated as savings and loan holding companies by the Board of Governors of the Federal Reserve System (“Federal Reserve”) as successors to the Office of Thrift Supervision (“OTS”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).


 
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Roma Bank is a federally-chartered stock savings bank. It was originally founded in 1920 and received its federal charter in 1991. Roma Bank’s deposits are federally insured by the Deposit Insurance Fund as administered by the Federal Deposit Insurance Corporation (“FDIC”). Roma Bank is regulated by the Office of the Controller of the Currency (“OCC”) as successor to the OTS.

RomAsia Bank is a federally-chartered stock savings bank. It received all regulatory approvals and began operation on June 23, 2008. RomAsia Bank is regulated by the OCC as successor to the OTS. Roma Bank and RomAsia Bank are collectively referred to herein as (the “Banks”).

The Banks offer traditional retail banking services, one-to four-family residential mortgage loans, multi-family and commercial mortgage loans, construction loans, commercial business loans and consumer loans, including home equity loans and lines of credit. Roma Bank operates from its main office in Robbinsville, New Jersey, and twenty-three branch offices located in Mercer, Burlington,  Camden and Ocean Counties, New Jersey. RomAsia Bank operates from two branches located in Monmouth Junction and Edison, New Jersey. As of December 31, 2012, the Banks, and their subsidiaries, had 314 full-time employees and 62 part-time employees. Roma Bank maintains a website at www.romabank.com. RomAsia Bank maintains a website at www.romasiabank.com. Information on our websites should not be treated as part of this Annual Report on Form 10-K.  The Company makes copies of its SEC filings available on the Investor Relations page of the Roma Bank website free of charge as soon as reasonably practicable after they are filed with the SEC.

The Company conducted a minority stock offering during 2006 in which 30% of its outstanding stock was sold to the public in a subscription offering. The offering closed July 11, 2006 and the net proceeds from the offering were approximately $96.1 million (gross proceeds of $98.2 million for the issuance of 9,819,562 shares, less offering costs of approximately $2.1 million). The Company also issued 22,584,995 shares to the MHC and 327,318 shares to the Roma Bank Community Foundation, Inc., resulting in a total of 32,731,875 shares issued and outstanding after the completion of the offering. A portion of the proceeds were loaned to the Roma Bank Employee Stock Ownership Plan (ESOP) to purchase 811,750 shares of the Company’s stock at a cost of $8.1 million.

On July 16, 2010, the Company completed its acquisition of Sterling Banks, Inc., the holding company for Sterling Bank.  The consideration paid in the transaction to stockholders of Sterling Banks, Inc. consisted of $2.52 per share or $14,725,000 in cash. We refer to this transaction as the “Sterling Merger”.

Throughout this document, references to “we,” “us,” or “our” refer to the Banks or Company, or both, as the context indicates.

Merger Agreement

On December 19, 2012, Roma Financial Corporation, Roma Bank and Roma Financial Corporation, MHC entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Investors Bancorp, Inc. (“Investors Bancorp”), Investors Bank (“Investors Bank”) and Investors Bancorp, MHC (“Investors MHC”).  Under the terms of the Merger Agreement, Roma MHC will merge into Investors MHC, with Investors MHC surviving, to be followed by the merger of Roma Financial Corporation into Investors Bancorp, with Investors Bancorp surviving, and the merger of Roma Bank into Investors Bank, with Investors Bank surviving.  Depositors of Roma Bank will become depositors of Investors Bank, and will have the same rights and privileges in Investors MHC as if their accounts had been established in Investors Bank on the date established at Roma Bank. The merger has been approved by each company's board of directors and is subject to the approval of Investors Bancorp’s and the Company’s shareholders, the MHC members, regulatory approvals and other customary closing
 
 
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conditions.  In addition, on January 17, 2013, RomAsia Bank entered into an Agreement and Plan of Merger with Investors Bank that provides for the merger of RomAsia Bank with and into Investors Bank. All of the transactions are expected to close in the second quarter of 2013 assuming all required approvals have been obtained.

Competition

We operate in a market area with a high concentration of banking and financial institutions, and we face substantial competition in attracting deposits and in originating loans. A number of our competitors are significantly larger institutions with greater financial and managerial resources and lending limits. Our ability to compete successfully is a significant factor affecting our growth potential and profitability.

Our competition for deposits and loans historically has come from other insured financial institutions such as local and regional commercial banks, savings institutions, de novo banks, and credit unions located in our primary market area. We also compete with mortgage banking and finance companies for real estate loans and with commercial banks and savings institutions for consumer and commercial loans, and we face competition for funds from investment products such as mutual funds, short-term money funds and corporate and government securities. There are large competitors operating throughout our total market area, and we also face strong competition from other community-based financial institutions. Approximately ten other institutions operate in the Banks’ market area, with asset sizes ranging from $150 million to $50+ billion.  As of June 30, 2012, Roma Bank was fifth in market share in Mercer County and sixth in Burlington County according to FDIC data.

Lending Activities

Analysis of Loan Portfolio.  We have traditionally focused on the origination of one- to four-family loans, which comprised approximately 42.4% of the total loan portfolio at the end of 2012. We also provide financing for commercial real estate, including multi-family dwellings, service/retail and mixed-use properties, churches and non-profit properties, and other commercial real estate. After real estate mortgage lending, consumer lending is our next largest category of lending and is primarily composed of home equity loans and lines of credit. We also originate construction loans for individual single-family residences and commercial loans to businesses and non-profit organizations, generally secured by real estate.

 
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Loan Portfolio Composition. The following table analyzes the composition of our loan portfolio by loan category at the dates indicated. Except as set forth below, there were no concentrations of loans exceeding 10% of total loans.

    At December 31,  
    2012     2011     2010     2009     2008  
     Amount      Percent      Amount      Percent      Amount      Percent      Amount      Percent      Amount      Percent  
    (Dollars in Thousands)  
Type of Loans:
                                                           
                                                             
Real estate mortgage -
one to four family
  $ 452,537       42.41 %   $ 394,206       40.24 %   $ 358,503       39.41 %   $ 251,937       42.21 %   $ 230,956       43.63 %
Real estate mortgage -
multi-family and commercial
    321,586       30.14       292,646       29.87       273,177       30.03       172,334       28.87       128,990       24.37  
Commercial business
    49,169       4.60       39,184       4.00       36,125       3.97       12,302       2.06       5,762       1.09  
Consumer:
                                                                               
Home equity and second
   mortgage
    216,383       20.28       217,472       22.20       202,926       22.31       133,199       22.32       133,855       25.28  
Other
    1,354       0.13       1,381       0.14       1,760       0.19       1,024       0.16       943       0.17  
Total consumer loans
    217,737       20.41       218,853       22.33       204,686       22.50       134,223       22.48       134,798       25.45  
Construction
    26,016       2.44       34,851       3.56       37,197       4.09       26,162       4.38       28,899       5.46  
   Total loans
    1,067,045       100.00 %     979,740       100.00 %     909,688       100.00 %     596,958       100.00 %     529,405       100.00 %
Less:
                                                                               
Construction loans in process
    19,503               10,796               5,339               5,524               6,543          
Allowance for loan losses
    8,669               5,416               9,844               5,243               2,223          
Deferred loan (costs) and fees, net
    1,469               1,139               663               432               233          
      29,641               17,351               15,846               11,199               8,999          
   Loans receivable, net
  $ 1,037,404             $ 962,389             $ 893,842             $ 585,759             $ 520,406          



 
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Loan Maturity Schedule. The following tables set forth the maturity of our loan portfolio at December 31, 2012. Demand loans, loans having no stated maturity, and overdrafts are shown as due in one year or less. Loans are stated in the following tables at contractual maturity and actual maturities could differ due to prepayments.

   
Real estate
mortgage-
One to four
family
   
Real estate
mortgage -
Multi-family
and commercial
   
Commercial
Business
   
Home equity
and second
mortgage loans
   
Other
   
Construction
   
Total
 
   
(In thousands)
 
Amounts Due:
                                         
Within 1 Year
  $ 9,033     $ 37,078     $ 20,439     $ 828     $ 1,264     $ 25,327     $ 93,969  
   After 1 year:
                                                       
1 to 3 years
    453       15,260       2,988       3,564       90       687       23,044  
3 to 5 years
    2,928       25,227       5,376       14,821       -       -       48,352  
5 to 10 years
    25,354       63,896       17,669       52,961       -       -       159,880  
10 to 15 years
    98,316       46,026       2,252       63,721       -       -       210,315  
Over 15 years
    316,453       134,099       445       80,488       -       -       531,485  
Total due after one year
    443,504       284,508       28,730       215,555       90       687       973,076  
                                                         
Total amount due
  $ 452,537     $ 321,586     $ 49,169     $ 216,383     $ 1,354     $ 26,016     $ 1,067,045  

 
 

 
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The following table sets forth the amount of all loans at December 31, 2012 that are due one year or more after December 31, 2012.
 
   
Fixed Rates
   
Floating or
Adjustable Rates
   
Total
 
   
(In thousands)
 
                   
Real estate mortgage – one to four family
  $ 361,465     $ 82,039     $ 443,504  
Real estate mortgage - multi-family and commercial
    124,579       159,929       284,508  
Commercial business
    15,245       13,485       28,730  
Construction
    397       292       689  
Consumer:
                       
Home equity and second mortgage loans
    164,985       50,570       215,555  
Auto and other
    90       -       90  
Total
  $ 666,761     $ 306,315     $ 973,076  

Residential Mortgage Lending. Our primary lending activity consists of the origination of oneto four family first mortgage loans. Fixed rate, conventional mortgage loans are offered by the Banks with repayment terms ranging from ten years to forty years. One, three, five, seven, ten and fifteen year adjustable rate mortgages, or ARMs, are offered at rates based upon the one year U.S. Treasury Bill rate plus a margin. After the initial one, three, five, seven, ten or fifteen year term, the Banks’ ARMs reset on an annual basis and, with the exception of the seven and fifteen year ARM, have two percent annual increase caps and six percent lifetime adjustment caps. The seven year product has an initial first adjustment cap of five percent (two percent thereafter) and a lifetime adjustment cap of six percent. There are no floors on the rate adjustments.

The Banks offer applicants the opportunity to “buy-down” mortgage loan interest rates by remitting one to three discount points for conventional loans and one point for ARMs. Borrowers may also accelerate the repayment of their loans by taking advantage of a bi-weekly payment program.

Substantially all residential mortgages include “due on sale” clauses, which are provisions giving the Banks the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party. Property appraisals on real estate securing one- to four-family residential loans are made by state certified or licensed independent appraisers and are performed in accordance with applicable regulations and policies. The Banks require title insurance policies on all first mortgage real estate loans originated. Homeowners, liability, fire and, if applicable, flood insurance policies are also required.

One to four family first mortgage loans in excess of 80% loan-to-value for single family or detached residences and 75% on condominium units typically require private mortgage insurance. The Banks will originate residential mortgage loans up to a maximum of 95% loan-to-value. Underwriting guidelines prescribe a maximum debt-to-income ratio of forty percent; however, the Banks may approve loans with higher debt ratios with the requirement for a risk premium of twenty-five to fifty basis points above the prevailing rate.

All of the Banks’ residential mortgage loan products are available to finance any owner occupied, primary or secondary (e.g., vacation homes), one- to four-family residential dwelling. Loans for non-owner occupied one  to four family residences are originated in accordance with the Banks’ commercial real estate lending policies as investment properties and are included under the commercial real estate category in the loan tables set forth herein.


 
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We do not offer interest-only loan products because of our concern about the credit risks associated with these products. The Banks have never been involved in any type of subprime lending.

Consumer Lending. The Banks offer fixed rate home equity loans and variable rate, revolving home equity lines of credit, each with a $10 thousand minimum and a $500 thousand maximum loan amount. Loan requests in excess of $500 thousand are considered on a case-by-case basis. There are no fees, points or closing costs associated with the application or closing of an equity loan or line of credit. All equity financing is secured by owner occupied, primary or secondary, one- to four-family residential property. Underwriting standards establish a maximum loan-to-value ratio of 75% for single family or detached residences and 75% for condominium units. Home equity loan appraisals may be done by automated appraisal valuation models for loans with a 60% or less loan-to-value ratio.

Fixed rate home equity loans. Fixed rate home equity loans are offered with repayment terms up to twenty years and are incrementally priced at thresholds up to 60, 120, 180 and 240 months. Loan rates are reviewed weekly to ensure competitive market pricing. Underwriting guidelines prescribe a maximum debt-to-income ratio of forty percent; however the Banks may approve loans with higher debt ratios with the requirement for a risk premium of twenty-five to fifty basis points above the prevailing rate.

Variable rate, revolving home equity lines of credit. The Banks’ home equity lines of credit are generally among the most competitive in the market area. Lines of credit are priced at the highest published Wall Street Journal Prime Interest Rate minus one-half of one percent, adjusted monthly with a rate ceiling of eighteen percent. Repayment terms are based upon a twenty year amortization, requiring monthly payments equivalent to 1/240th of the outstanding principal balance (or $100, whichever is greater) plus accrued interest on the unpaid balance for the billing cycle.

If the account is paid-off and closed via cancellation of the mortgage lien, then an early termination fee of $300 is charged if closed during the first twelve billing cycles, or $200 if closed during the next twelve billing cycles. There is no termination fee after twenty-four billing cycles.

Account loans. The Banks grant loans to customers of the Banks collateralized by deposits in specific types of savings/time deposit accounts. Money market deposit passbook accounts are not eligible for account loans. A ninety percent advance rate is provided at pricing three percent above the interest rate paid on the collateral account.

Consumer lending is generally considered to involve a higher degree of credit risk than residential mortgage lending. All consumer loans are secured with either a first or second lien position on owner occupied real estate. Account loans are fully secured. Consumer loan repayment is dependent on the borrower’s continuing financial stability and can be adversely affected by job loss, divorce, illness or personal bankruptcy. The application of various federal laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on consumer loans in the event of a default.

Commercial Lending. Though Roma Bank has historically made loans to businesses and not-for-profit organizations, it formalized its commercial lending activities in 2003 with the establishment of a Commercial Loan Department. RomAsia Bank has offered commercial loan products since the time of opening.


 
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The majority of commercial loans approved and funded are commercial real estate loans for acquisition or refinancing of commercial properties. The Banks also offer a full menu of non-mortgage commercial loan products, tailored to serve customer needs, as follows:

•      Lines of credit to finance short term working capital needs;
•      small business revolving lines of credit;
•      equipment acquisition lines of credit convertible to term financing;
•      short term time notes;
•      term financing to finance capital acquisitions; and
•      business vehicle financing.

We typically require personal guarantees on the majority of commercial loans. Values are established by conforming real estate appraisals. The Banks’ guidelines for commercial real estate collateral are currently as follows:

Collateral
Maximum Loan-to-Value
Maximum Amortization
     
1-4 family residential (investment)
70%
25 years
     
Multi-family (5+ units)
70%
25 years
     
Commercial real estate (owner
   Occupied)
80%
25 years
     
Commercial real estate (non-owner
  Occupied)
70%
25 years

Current advance rates for other forms of collateral include the following:

Collateral
Maximum Loan-to-Value
   
Commercial equipment
60% - 70% of invoice
   
Owned equipment
50% - 60% depreciated book value
   
Accounts receivable
70% of eligible receivables
   
Inventory (including work-in-process)
50% of cost
   
Liquid collateral
publicly traded marketable securities, 70%
U.S. Government securities, 90%

The pricing for fixed rate commercial real estate mortgage loans provides for rate adjustments after an initial term (generally five years), and at each anniversary thereafter, based on a margin plus the Banks’ Reference Rate which is published in the Wall Street Journal as the prime interest rate, the London Interbank Offered Rate (“LIBOR”), the 5 year Federal Home Loan Bank of New York rate (“FHLBNY”) or the Federal Reserve 5 year, H-15, constant maturity Treasury rate, as applicable.

The variable rate loans are indexed to various indices including Wall Street Journal Prime, the FHLB rate or LIBOR.

Unlike single-family residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are
 
 
 
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secured by real property the value of which tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself and the general economic environment. Commercial loans, therefore, have greater credit risk than residential mortgage or consumer loans. In addition, commercial loans generally result in larger balances to single borrowers, or related groups of borrowers, than one- to four-family loans. Commercial lending also generally requires substantially greater evaluation and oversight efforts.

Construction Lending. We originate construction loans for residential and commercial land acquisition and development, including loans to builders and developers to construct one- to four-family residences on undeveloped real estate, and retail, office, warehouse and industrial or other commercial space. Disbursements are made in accordance with an inspection report by an architect or, in the case of construction loans up to $500 thousand, an inspection report by an approved appraiser or Bank personnel. Our construction lending includes loans for construction or major renovations or improvements of borrower-occupied residences; however, the majority of this portfolio is commercial in nature.

The Banks’ guidelines for construction lending are currently as follows:

Collateral
Maximum Loan-to-Value
Maximum Amortization
     
Land
50% - unimproved
60% - with all municipal approvals
60% - improved
1 year, with two 6-month extensions
1 year, with two 6-month extensions
1 year, with two 6 -month extensions
     
Residential & commercial construction
70% (or 80% of cost)
1 year, with two 6-month extensions

Construction lending is generally considered to involve a higher degree of credit risk than residential mortgage lending. If the estimate of construction cost proves to be inaccurate, we may be compelled to advance additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, there is no assurance that we will be able to recover the entire unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time.

Loans to One Borrower. Under federal law, savings institutions have, subject to certain exemptions, lending limits to one borrower in an amount equal to the greater of $500 thousand or 15% of the institution’s unimpaired capital and surplus. Accordingly, as of December 31, 2012, Roma Bank’s loans to one borrower legal limit was $25.8 million. However, Roma Bank has set an internal limit of $5.0 million for the origination of loans to one borrower. RomAsia Bank’s legal limit is $2.3 million with and internal limit of $1.5 million.

Roma Bank’s Commercial Loan Policy requires Roma Bank Board approval for loans in excess of $5.0 million. Prior to presentation to the Roma Bank Board, the loan request is underwritten in accordance with policy and presented to the Officers’ Commercial Loan Committee for its consideration and recommendation to the Roma Bank Board for approval. The Roma Bank Board’s determination to grant a credit in excess of the $5.0 million internal limit is based upon thorough underwriting which must clearly demonstrate repayment ability and collateral adequacy. Additionally, these loans are approved
 
 
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only if the loan can be originated on terms which suit the needs of the borrower without exposing the Banks to unacceptable credit risk and interest rate risk. RomAsia Bank’s Commercial Loan Policy requires the RomAsia Board Loan Committees approval for loans in excess of $1.0 million.

At December 31, 2012, Roma Bank’s largest single borrower had an aggregate loan balance of approximately $15.2 million, secured by commercial real estate. The second largest single borrower had an aggregate loan balance of approximately $9.6 million, secured by commercial real estate. The third largest borrower had an aggregate loan balance of $8.3 million comprised of commercial real estate loans.  At December 31, 2012, the loans of these first and second borrowers were current and performing in accordance with the terms of their loan agreements. The $8.0 million loan to the third largest borrower is a TDR that is performing according to the terms of the restructure.

Loan Originations, Purchases, Sales, Solicitation and Processing. The following table shows total loans originated, purchased, sold and repaid during the periods indicated.

    For the Year Ended December 31,  
     2012      2011      2010  
    (In thousands)  
Loan originations and draws:
                 
Real estate mortgage - one-to-four family
  $ 216,625     $ 118,774     $ 101,590  
Real estate mortgage - multi-family and commercial
    46,313       65,540       31,962  
Commercial business
    601       10,251       25,279  
Construction
    13,493       3,986       5,244  
Consumer:
                       
Home equity loans and second mortgage
    47,464       71,567       59,100  
Passbook or certificate
    454       380       586  
Other
    -       -       -  
Total loan originations
    324,950       270,498       223,761  
Loan purchases, loans acquired in merger
    -       -       272,313  
Loans sold (mortgage loans)
    55,996       24,492       20,343  
Loan principal repayments
    181,649       175,954       163,021  
Total loans sold and principal repayments
    237,645       200,446       183,364  
Increase (decrease) due to other items
    -       -       -  
Net increase in loan portfolio
  $ 87,305     $ 70,052     $ 312,710  

Sources of loan applications include repeat customers, referrals from realtors and other professionals, commissioned home mortgage consultants and “walk-in” customers. Our residential loan originations are largely reputational and advertisement driven.

The Banks adhere to the residential mortgage underwriting standards of the Mortgage Partnership Finance Program of the FHLBNY, as well the standards of Fannie Mae and Freddie Mac. From time to time, the Banks sell thirty year fixed rate mortgages that qualify for sale in the secondary mortgage market in order to lessen interest rate risk.

Since 2003, Roma Bank has had an Agreement with the FHLBNY to sell residential mortgages as a participating institution in its Mortgage Partnership Finance Program. Roma Bank agreed to deliver loans under a $5.0 million Master Commitment which was subsequently increased in 2006 to $10.0 million, to $15.0 million in 2008, and to $50 million which was renewed in 2011 and 2012.
 
 
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Sales commenced in 2004 and, through December 31, 2012, $77.9 million in loans had been delivered to the MPF program. In addition to an origination premium, the Bank also realizes income  from credit enhancement fees and loan servicing income. During 2012, Roma Bank sold $38.9 million of loans. RomAsia Bank also sold $17.0 million of residential mortgage loans in 2012.

The Company did not purchase loans from any third parties in the year ended December 31, 2012.  At December 31, 2012, the total outstanding balance of loan participations purchased was $22.1 million, representing participations in commercial loans with area banks and thrifts.

Loan Approval Procedures and Authority. Lending policies and loan approval limits are approved and adopted by the respective Boards of Directors. Loan committees at Roma Bank have been established to administer lending activities as prescribed by lending policies. Two committee members may together approve non-commercial loans up to $500 thousand. A majority of members is required to approve non-commercial loans that contain credit policy exceptions, with the condition that the President, the Chairman, or Executive Vice President is one of the approving members. Non-commercial loans over $500 thousand require the approval of the Boards of Directors.

Commercial lending approval authority for Roma Bank is as follows: up to $750 thousand, any two of the following: a commercial loan officer and either the Chief Lending Officer, or the President or the Executive Vice President; over $750 thousand and up to $1.5 million, any two of the following: the Chief Lending Officer and the President or the Executive Vice President; over $1.5 million and up to $5.0 million, the loan committee; and over $5.0 million and up to 10% of the total equity of Roma Bank, the Boards of Directors.

Commercial lending approval authority for RomAsia Bank is as follows: up to $500 thousand, any two of the following: the Residential Lending Manager, Commercial Loan Officer, Chief Loan Officer, Chief Financial Officer, and President, provided that either the Chief Loan Officer or the President is included; over $500 thousand to $1.0 million, any three members of the Officers’ Loan Committee provided that either the Chief Lending Officer or the President is included.  If any of the members of the Officers’ Loan Committee is unavailable, any additional member of the Board Loan Committee may be added for that meeting; over $1.0 million and up to 10% of the total equity of RomAsia Bank, the Board Loan Committee.

Asset Quality

Loan Delinquencies and Collection Procedures. The borrower is notified by both mail and telephone when a loan is thirty days past due. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower and additional collection notices and letters are sent. When a loan is ninety days delinquent, it is our general practice to refer it to an attorney for collection, repossession or foreclosure action. All reasonable attempts are made to collect from borrowers prior to referral to an attorney for collection. In certain instances, we may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his or her financial affairs, and we attempt to work with the borrower to establish a repayment schedule to cure the delinquency.

As to mortgage loans, if a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure, or by deed in lieu of foreclosure, is classified as real estate owned until it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its fair market value less estimated selling costs. The initial write down of the property is charged to the
 
 
11

 
 
allowance for loan losses. Adjustments to the carrying value of the property that result from subsequent declines in value are charged to operations in the periods in which the declines occur.

Loans are reviewed on a regular basis and are placed on non-accrual status when they are more than ninety days delinquent, with the exception of a passbook loan, the outstanding balance of which is collected from the related passbook account along with accrued interest and a penalty when the loan is 90 days delinquent. Loans may be placed on a non-accrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Payments received in cash on nonaccrual loans, including both the principal and interest portions of those payments, are generally applied to reduce the carrying value of the loan for financial statement purposes.  At December 31, 2012, approximately $47.3 million of loans were on a non-accrual basis.

Non-Performing Assets. The following table provides information regarding our non-performing loans.   As of December 31, 2012 and 2011, Roma Bank also had non-performing assets in the form of real estate owned of $8.3 million and $3.3 million, respectively.  At December 31, 2012, the allowance for loan losses totaled $8.7 million, non-performing loans totaled $47.3 million, and the ratio of allowance for loan losses to non-performing loans was 18.3%. Management believes that the non-performing loans are well secured and that adequate impairments have been recognized to absorb any losses which may occur upon the ultimate resolution. The legacy Roma Bank and RomAsia Bank loan portfolio includes 77 non-performing loans totaling $30.8 million.  The portfolio includes $20.4 million in commercial real estate loans, $3.2 million in commercial construction loans, and $7.2 million of residential mortgage and equity loans. The ratio of allowance for loan losses to legacy Roma Bank and RomAsia Bank non-performing loans was 25.6%.  Non-performing loans also includes $15.7 million of non-performing loans acquired from Sterling net of $2.9 million of credit marks.  The loans primarily consist of $5.3 million of residential construction loans, $4.2 million in commercial real estate loans, and $6.2 million of mortgage and equity secured by other than real estate.  RomAsia Bank has $0.8 million of non-performing loans.

 
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    At December 31,  
     2012      2011      2010      2009      2008  
    (Dollars in thousands)  
Loans accounted for on a non-accrual basis:
                             
  Residential real estate and construction
  $ 15,656     $ 21,933     $ 14,761     $ 1,173     $ 754  
  Home equity and second mortgage loans
    2,955       1,964       1,120       629       44  
  Commercial, commercial real estate and const.
    28,702       21,080       24,529       12,987       9,510  
                                         
Total
    47,313       44,977       40,410       14,789       10,308  
                                         
Accruing loans three month or more past due:
                                       
  Residential real estate and construction
    250       549       1,230       707       494  
  Home equity and second mortgage loans
    -       228       79       207       2  
  Commercial, commercial real estate and
                                       
  Construction
    -       614       437       1,204       238  
Total loans three months or more past due
    250       1,391       1,746       2,118       737  
                                         
Total non-performing loans
    47,563       46,368       42,156       16,907       11,042  
Real estate owned
    8,340       3,276       3,689       1,928       68  
Total non-performing assets
    55,903       49,644       45,845       18,835       11,110  
Performing troubled debt restructures
    718       -       -       -       -  
Total performing troubled debt restructures and
non-performing assets
  $ 56,621     49,644     45,845     18,835     11,110  
                                         
Total non-performing loans to total loans
    4.45 %     4.73 %     4.63 %     2.83 %     2.08 %
Total non-performing loans and performing
troubled debt restructures to total loans
    4.52 %     4.73 %     4.63 %     2.83 %     2.08 %
Total non-performing assets to total assets
    3.08 %     5.07 %     5.04 %     3.16 %     2.10 %
                                         
Total non-performing assets and performing
troubled debt restructures to total assets
    3.12 %     5.07 %     5.04 %     3.16 %     2.10 %

During the year ended December 31, 2012, gross interest income of $1.8 million would have been recorded on loans accounted for on a non-accrual basis if those loans had been current, and $40 thousand of interest from cash payments on such loans was included in income for the year ended December 31, 2012.

Classified Assets. Management, in compliance with OCC guidelines, has instituted an internal loan review program, whereby non-performing loans are classified as substandard, doubtful or loss. It is our policy to review the loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis. When a loan is classified as substandard or doubtful, management is required to evaluate the loan for impairment. When management classifies a portion of a loan as loss, a reserve equal to 100% of the loss amount is required to be established or the loan is charged-off.

An asset is considered “substandard” if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Banks will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets, or portions
 
 
13

 
 
thereof, classified as “loss” are considered uncollectible and of so little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the Banks to a sufficient degree of risk to warrant classification in one of the aforementioned categories but which have credit deficiencies or potential weaknesses are required to be designated “special mention” by management.

Management’s classification of assets is reviewed by the Boards on a regular basis and by the regulatory agencies as part of their examination process. An independent loan review firm performs periodic reviews of our commercial loan portfolios, including the verification of commercial loan risk ratings. Any disagreements in risk rating assessments require mutual consent as to the final risk rating.

The following table discloses the classification of assets and designation of certain loans as special mention as of the dates indicated. At each date, all of the classified assets and special mention designated assets were loans.

    At December 31,  
    2012      2011      2010  
    (In thousands)  
                   
Special Mention
  $ 27,714     $ 18,653     $ 29,803  
Substandard
    61,224       70,199       59,933  
Doubtful
    -       -       -  
Loss
    -       -       -  
Total
  $ 88,938     $ 88,852     $ 89,736  

At December 31, 2012, $46.1 million of the loans classified as “substandard” are also classified as non-performing assets. The substandard loans not categorized as non-performing are primarily secured by real estate and consist of $9.6 million of commercial loans and $5.5 million of residential and consumer loans. Total classified loans at December 31, 2012 and 2011, include $32.4 million and $39.9 million, respectively, of loans acquired in the Sterling Merger.

Allowance for Loan Losses (“ALLL”). The allowance for loan losses is a valuation account that reflects our estimation of the losses in our loan portfolio to the extent they are both probable and reasonable to estimate. The allowance is established through provisions for loan losses that are charged to income in the period they are established. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. Recoveries on loans previously charged-off are added back to the allowance.

In order to comprehensively address periodic provisioning and the resultant ALLL, the Banks utilize a multidisciplinary approach which considers each of the following factors: historical realized losses in the credit portfolio; delinquency trends currently experienced in the current portfolio; internal risk rating system that assigns a risk factor, and therefore, a  reserve to every outstanding credit exposure; external independent assessment of the adequacy of the ALLL and the entire credit management function; and current and anticipated economic conditions that could affect borrowers’ ability to continually meet their contractual repayment obligations.

A loan evaluated for impairment is deemed to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Payments received on impaired loans are typically applied
 
 
14

 
 
first to principal and then to principal and unpaid interest depending on collateral coverage, and if the loan is in non-accrual status.

We maintain a loan review system which provides for a systematic review of the loan portfolios and the early identification of potential impaired loans. The review of residential real estate and home equity consumer loans, as well as other more complex loans, is triggered by identified evaluation factors, including delinquency status, size of loan, type of collateral and the financial condition of the borrower.

General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management’s judgment. Our charge-offs for the last several years were: $59 thousand in 2007; $181 thousand in 2008; $278 thousand in 2009; $2.3 million in 2010; $9.0 million in 2011; and, $3.6 million in 2012. In the last quarter of 2011, $5.1 million of specific reserves were charged off against the respective impaired loans.  Our provisions for loan losses are also reflective of other factors, including economic conditions, annual growth of the total loan portfolio of 10%, 12%, 12.8%, 6.8% and 8.9% in 2008, 2009, 2010, 2011 and 2012, respectively, exclusive of loans acquired in merger.

The estimation of the allowance for loan losses is inherently subjective as it requires estimates and assumptions that are susceptible to significant revisions as more information becomes available or as future events change. Future additions to the allowance for loan losses may be necessary if economic and other conditions in the future differ substantially from the current operating environment. In addition, the OCC, as an integral part of its examination process, periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OCC may require the allowance for loan losses or the valuation allowance for foreclosed real estate to be increased based on its review of information available at the time of the examination, which would negatively affect our earnings.

Loans acquired in the Sterling Merger are carried at fair value with no carryover of the related allowance for loan losses. Therefore, these acquired loans are not included in the allowance for loan loss calculation.  Impaired loans include $32.4 million of loans, net of credit marks of $7.7 million, which were acquired in the merger.  Loans totaling $6.6 million, net of credit marks of $4.0 million, which are performing, are also included in this total and are classified as impaired because at the effective time of the Sterling Merger there was evidence of deterioration of credit quality since origination, primarily collateral related.


 
15

 

The following table sets forth information with respect to our allowance for loan losses at the dates indicated.

   
For the Year Ended December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
(Dollars in thousands)
 
                               
Allowance balance (at beginning of period)
  $ 5,416     $ 9,844     $ 5,243     $ 2,223     $ 1,602  
Provision for loan losses
    6,726       4,491       6,855       3,280       787  
Charge-offs:
                                       
Commercial real estate
    (2,446 )     (5,162 )     (2,254 )     (214 )      
Commercial construction
    (297 )     (2,015 )                  
Commercial
    (387 )     (1,292 )                  
Residential mortgage and equity
    (347 )     (490 )                  
Passbook, certificate, overdraft
    (76 )     (64 )           (64 )     ( 181 )
Total charge-offs
    (3,553 )     (9,023 )     (2,254 )     (278 )     (181 )
Recoveries
    80       104             18       15  
Net (charge-offs) recoveries
    (3,432 )     (8,919 )     (2,254 )     (260 )     (166 )
Allowance balance (at end of period)
  $ 8,669     $ 5,416     $ 9,844     $ 5,243     $ 2,223  
                                         
Total loans outstanding
  $ 1,067,045     $ 979,740     $ 909,688     $ 596,958     $ 529,405  
Total  legacy Roma Bank loans outstanding
  $ 904,595     $ 762,313     $ 620,426     $ 596,958     $ 529,405  
Average loans outstanding
  $ 1,016,058     $ 943,587     $ 744,946     $ 555,108     $ 482,557  
Allowance for loan losses as a percent of total
loans outstanding
    0.81 %     0.55 %     1.08 %     0.88 %     0.42 %
Allowance for loan losses as a percent of total legacy
Roma Bank  loans outstanding
    0.96 %     0.71 %     1.59 %     0.88 %     0.42 %
Net loans charged off as a percent of average
loans outstanding
    0.34 %     0.95 %     0.03 %     0.05 %     0.03 %
Allowance for loan losses to non-performing loans
    18.30 %     12.04 %     24.4 %     35.4 %     21.42 %
Allowance for loan losses to legacy Roma Bank
non-performing loans
    28.10 %     23.1 %     43.8 %     35.4 %     21.42 %



 
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Allocation of Allowance for Loan Losses. The following table sets forth the allocation of our allowance for loan losses by loan category based on the relative composition of loans in the portfolio and the percent of loans in each category to total loans at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the entire loan loss allowance is a valuation reserve applicable to the aggregate loan portfolio. Non accretable fair market adjustments to acquired loans are not included.


    At December 31,  
    2012     2011     2010     2009     2008  
    Amount      Percent
of Loans
to Total
Loans
     Amount      Percent
of Loans
to Total
Loans
     Amount    
 Percent
of Loans
to Total
Loans
     Amount      Percent
of Loans
to Total
Loans
     Amount      Percent
of Loans
to Total
Loans
 
    (Dollars in thousands)  
At end of period allocated to:
                                                           
Real estate mortgage -
     One to four family
  $ 1,410       42.41 %   $ 1,705       40.24 %   $ 1,799       39.41 %   $ 312       42.21 %   $ 209       43.63 %
Commercial real estate
    4,455       30.14       2,181       29.87       4,922       30.03       3,255       28.87       1,601       24.37  
Commercial business
    1,465       4.60       199       4.00       654       3.97       1,206       2.06       72       1.09  
Consumer:
                                                                               
Home equity and other
  consumer loans
    536       20.41       663       22.34       372       22.31       156       22.32       119       25.28  
Passbook, certificate,
  overdraft
            -       -       -       -       .19       7       0.16       14       0.17  
Construction
    803       2.44       668       3.55       2,097       4.09       307       4.38       208       5.46  
Total allowance
  $ 8,669       100.00 %   $ 5,416       100.00 %   $ 9,844       100.00 %   $ 5,243       100.00 %   $ 2,223       100.00 %



 
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Securities Portfolio

General. Our deposits have traditionally exceeded our loan originations, and we have invested these excess deposits primarily in mortgage-backed securities and investment securities.

Our investment policy is designed to foster earnings and manage cash flows within prudent interest rate risk and credit risk guidelines. Generally, our investment policy is to invest funds in various categories of securities and maturities based upon our liquidity needs, asset/liability management policies, pledging requirements, investment quality, marketability and performance objectives. Roma Bank’s investment policies specify the responsibility for the investment portfolio, asset/liability management and liquidity management and established an oversight Investment Committee. The Investment Committee, which is comprised of at least one Board member and the members of management responsible for investment decisions and accountability, meets quarterly to review the portfolio and performance risks and future purchasing strategies. The investment officer is authorized to purchase securities to the limit of $5.0 million per trade per issue with the prior approval of the President, Executive Vice President or Investment Committee.

All of our securities carry market risk insofar as increases in market rates of interest may cause a decrease in their market value. Prior to investing, consideration is given to the interest rate, tax considerations, market volatility, yield, settlement date and maturity of the security, our liquidity position, and anticipated cash needs and sources. The effect that the proposed security would have on our credit and interest rate risk and risk-based capital is also considered.

Federally chartered savings banks have the authority to invest in various types of liquid assets. The investments authorized under the Banks’ investment policies include U.S. government and government agency obligations, municipal securities (consisting of bond obligations of state and local governments), mortgage-backed securities, collateralized mortgage obligations and corporate bonds. On a short-term basis, the investment policies authorize investment in federal funds, certificates of deposits and money market investments with insured institutions and with brokerage firms.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, “Investments-Debt and Equity Securities”, requires that securities be categorized as “held to maturity,” “trading securities” or “available-for-sale,” based on management’s intent as to the ultimate disposition of each security. FASB ASC Topic 320 allows debt securities to be classified as “held to maturity” and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, or other similar factors cannot be classified as “held to maturity.”

We do not currently use or maintain a trading account. Securities not classified as “held to maturity” are classified as “available-for-sale.”  These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of equity.

At December 31, 2012, our securities portfolio did not contain securities of any issuer, other than the U.S. government or its agencies, having an aggregate book value in excess of 10% of our equity. We do not currently participate in hedging programs, interest rate caps, floors or swaps, or other activities involving the use of off-balance sheet derivative financial instruments, however, we may in the future
 
 
18

 
utilize such instruments if we believe it would be beneficial for managing our interest rate risk. Further, we do not purchase securities which are not rated investment grade.

Actual maturities of the securities held by us may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. At December 31, 2012, we had $113.7 million of callable securities, net of premiums and discounts, in our portfolio. Callable securities pose reinvestment risk because we may not be able to reinvest the proceeds from called securities at an equivalent or higher interest rate.

Mortgage-backed Securities and Collateralized Mortgage Obligations. Mortgage-related securities represent a participation interest in a pool of one to four family or multi-family mortgages. We primarily invest in mortgage-backed securities secured by one-to-four-family mortgages. Our mortgage-related securities portfolio includes mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies or government-sponsored entities, such as Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, and the Federal National Mortgage Association. We do not currently invest in mortgage-related securities issued by non-government, private corporate issuers.

Mortgage originators use intermediaries (generally government agencies and government-sponsored enterprises, but also a variety of private corporate issuers) to pool and repackage the participation interests in the form of securities, with investors receiving the principal and interest payments on the mortgages. Securities issued or sponsored by U.S. government agencies and government-sponsored entities are guaranteed as to the payment of principal and interest to investors. Privately issued non-government, corporate issuers’ securities typically offer rates above those paid on government agency issued or sponsored securities, but lack the guaranty of those agencies and are generally less liquid investments.

Mortgage-backed securities are pass-through securities typically issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a specific range and have varying maturities. The life of a mortgage-backed security thus approximates the life of the underlying mortgages. Mortgage-backed securities generally yield less than the mortgage loans underlying the securities. The characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates.

Collateralized mortgage obligations are mortgage-derivative products that aggregate pools of mortgages and mortgage-backed securities and create different classes of securities with varying maturities and amortization schedules as well as a residual interest with each class having different risk characteristics. The cash flows from the underlying collateral are usually divided into “tranches” or classes which have descending priorities with respect to the distribution of principal and interest repayment of the underlying mortgages and mortgage-backed securities as opposed to pass-through mortgage-backed securities where cash flows are distributed pro rata to all security holders. It is our policy to buy mortgage-derivative products that have no more risk than the underlying mortgages. The Banks have reviewed their portfolio of mortgage-backed securities and believe they do not have any subprime exposure in this area.

 
19

 

The following table sets forth the carrying value of our securities portfolio at the dates indicated.

    At December 31,  
     2012      2011      2010      2009      2008  
    (In Thousands)  
Securities Available for Sale:
                             
                               
Mutual fund shares
  $ 3,048     $ 2,935     $ 2,794     $ 2,686     $ 2,449  
                                         
Equity securities
    56       49       53       1,387       2,881  
                                         
Corporate bond
    991       894       988             955  
                                         
Mortgage-backed securities
    12,278       23,368       23,999       8,308       3,056  
                                         
U.S. Government agency obligations
    8,648       9,639       16,019       8,307       2,869  
                                         
Obligations of state and political subdivisions
    3,900       5,606       8,660       9,456       4,790  
                                         
Total securities available for sale
    28,921       42,491       52,513       30,144       17,000  
                                         
Investment Securities Held to Maturity:
                                       
                                         
U.S. Government agency obligations
    110,202       220,728       227,522       292,427       67,985  
                                         
Obligations of states and political subdivisions
    16,122       18,684       15,628       11,943       6,130  
                                         
Corporate bond
    1,592       1,773       1,271       979        
                                         
Total investment securities held to maturity
    127,916       241,185       244,421       305,349       74,115  
                                         
Mortgage-Backed Securities Held to Maturity:
                                       
                                         
Ginnie Mae
    6,254       7,906       9,988       7,148       8,888  
                                         
Freddie Mac
    124,408       181,779       172,969       123,244       154,246  
                                         
Fannie Mae
    209,157       242,568       229,951       107,294       124,942  
                                         
Collateralized mortgage obligations
    3,499       6,270       8,206       10,740       13,802  
                                         
Total mortgage-backed securities held to maturity
    343,318       438,523       421,114       248,426       301,878  
                                         
Total
  $ 500,155     $ 722,199     $ 718,048     $ 583,919     $ 392,993  

 
20

 


The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our securities portfolio at December 31, 2012. This table shows contractual maturities and does not reflect re-pricing or the effect of prepayments. Actual maturities may differ.


   
At December 31, 2012
 
   
One Year or Less
 
One to Five Years
 
Five to Ten Years
 
More than Ten Years
 
Total Investment Securities
 
   
Carrying
Value
 
Average
Yield
 
Carrying
Value
 
Average
Yield
 
Carrying
Value
 
Average
Yield
 
Carrying
Value
 
Average
Yield
 
Carrying
Value
 
Average
Yield
 
Market
Value
 
   
(Dollars in thousands)
 
                                                           
Mutual fund shares
 
$
3,048
 
4.00%
 
$
-
 
    -  %
 
$
-
 
    -  %
 
$
-
 
     -  %
 
$
3,048
 
4.00%
 
$
3,048
 
Equity securities
   
56
 
-
   
-
 
-   
   
-
 
 -     
   
-
 
 -   
   
56
 
2.52
   
56
 
Corporate bond
   
-
 
-
   
1,972
 
2.12
   
509
 
3.10
   
-
 
 -   
   
2,481
 
2.14
   
2,495
 
U.S. Government obligations
   
-
 
-
   
30,317
 
0.80
   
85,596
 
1.41
   
3,039
 
1.65
   
118,952
 
1.28
   
119,045
 
Obligations of states and
  political subdivisions
   
-
 
 
-
   
2,671
 
4.40
   
6,949
 
4.40
   
10,402
 
3.50
   
20,022
 
4.01
   
21,487
 
Ginnie Mae
   
-
 
-
   
18
 
1.00
   
304
 
1.74
   
8,307
 
3.20
   
8,629
 
2.74
   
8,678
 
Freddie Mac
   
-
 
-
   
3,060
 
4.89
   
7,570
 
4.18
   
116,153
 
3.57
   
126,783
 
3.57
   
132,090
 
Fannie Mae
   
-
 
-
   
3,695
 
5.09
   
71,626
 
3.76
   
140,294
 
3.80
   
215,615
 
3.86
   
230,711
 
Collateralized mortgage
  obligations
   
-
 
 
-
   
231
 
4.95
   
812
 
4.50
   
3,526
 
3.24
   
4,569
 
3.58
   
4,718
 
Total
 
$
3,104
     
$
41,964
     
$
173,366
     
$
281,721
     
$
500,155
     
$
522,328
 



 
21

 

Sources of Funds

General. Deposits are the Banks’ major source of funds for lending and other investment purposes. In addition, we derive funds from loan and mortgage-backed securities principal repayments, and proceeds from the maturity and call of investment securities. Loan and securities payments are a relatively stable source of funds, while deposit inflows are significantly influenced by pricing strategies and money market conditions. If required, borrowings (principally from the FHLBNY) may be used to supplement the amount of funds for lending and funding daily operations. Borrowings may also be utilized as part of a leverage strategy in which the borrowings fund securities purchases.

Deposits. Our current deposit products include checking and savings accounts, money market, and certificates of deposit accounts ranging in terms from ninety-one days to seven years, and individual retirement accounts. Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest rate.

Deposits are obtained primarily from within New Jersey. Traditional methods of advertising are used, or may be used, to attract new customers and deposits, including radio, print media, direct mail and inserts included with customer statements. We do not currently utilize the services of deposit brokers. Premiums or incentives for opening accounts are sometimes offered, and we periodically select particular certificate of deposit maturities for promotion. The Banks have a tiered savings product that offers an  interest rate related to predetermined tiered balance requirements. Customers that maintain a minimum balance requirement in the tiered account are not charged a monthly service fee for the savings account or for checking accounts and also receive overdraft protection, Visa check card and coin counting services.

The determination of deposit and certificate interest rates is based upon a number of factors, including: (1) need for funds based on loan demand, current maturities of deposits and other cash flow needs; (2) a current survey of a selected group of competitors’ rates for similar products; (3) economic conditions; and (4) business plan projections. Interest rates are reviewed weekly at a meeting of the Asset Liability Committee which consists of senior management.

A large percentage of our deposits are in certificates of deposit, which totaled 44.2% of total deposits at December 31, 2012. The inflow of certificates of deposit and the retention of such deposits upon maturity are significantly influenced by general interest rates and money market conditions, making certificates of deposit traditionally a more volatile source of funding than core deposits. Our liquidity could be reduced if a significant amount of certificates of deposit maturing within a short period of time were not renewed. To the extent that such deposits do not remain with us, they may need to be replaced with borrowings which could increase our cost of funds and negatively impact our interest rate spread and our financial condition. Historically, a significant portion of the certificates of deposit remain with us after they mature and we believe that this will continue. At December 31, 2012, $203.2 million, or 31.1%, of our certificates of deposit were “jumbo” certificates of $100 thousand or more.





 
22

 

The following tables set forth the distribution of average deposits for the periods indicated and the weighted average nominal interest rates for each period on each category of deposits presented.


   
For the Year Ended December 31,
   
2012
 
2011
 
2010
   
 
 
Average
Balance
 
 
Percent
of Total
Deposits
 
Weighted
Average
Nominal
  Rate
 
 
 
Average
Balance
 
 
Percent
of Total
Deposits
 
Weighted
Average
Nominal
   Rate
 
 
 
Average
Balance
 
 
Percent
of Total
Deposits
 
Weighted
Average
Nominal
  Rate
   
(Dollars in thousands)
                                           
Non-interest-bearing demand
 
$
68,595
 
 4.52
0.00%
 
$
65,393
 
4.18
%
0.00%
 
$
    49,386
 
3.93
%
0.00%
Interest-bearing demand
   
212,165
 
13.98
 
0.11    
   
179,533
 
11.48
 
0.16    
   
152,418
 
12.13
 
0.38   
Money market demand
   
373,724
 
24.62
 
0.45    
   
348,938
 
22.32
 
0.50    
   
231,704
 
18.44
 
1.01   
Savings and club
   
141,016
 
  9.29
 
0.16    
   
146,222
 
9.36
 
0.27    
   
124,788
 
9.93
 
0.82   
Certificates of deposit
   
722,209
 
47.59
 
1.31    
   
823,007
 
52.66
 
1.62    
   
698,246
 
55.57
 
1.98   
                                           
  Total deposits
 
$
1,517,709
 
100.00
%
0.69%
 
$
1,563,093
 
100.00
%
0.98%
 
$
1,256,542
 
100.00
%
1.41%



 
23

 

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.

   
At December 31,
 
   
2012
   
2011
   
2010
 
       Interest Rate
 
(In thousands)
 
                   
       0.00-1.99%
  $ 520,353     $ 567,063     $ 544,090  
                         
       2.00-2.99%
    98,909       186,339       204,973  
                         
       3.00-3.99%
    35,233       39,169       62,549  
                         
       4.00-4.99%
    1,712       3,547       5,334  
                         
       5.00% and above
    -       -       5,482  
                         
       Total
  $ 656,207     $ 796,118     $ 822,428  

The following table sets forth the amount and maturities of certificates of deposit at December 31, 2012.

   
Amount Due
 
   
1 year
   
1-2 years
   
2-3 years
   
3-4 years
   
4-5 years
   
5 years
   
Total
 
Interest Rate
 
(In thousands)
 
                                           
0.00-1.99%
  $ 354,150     $ 123,083     $ 28,289     $ 8,071     $ 6,726     $ 35     $ 520,353  
                                                         
2.00-2.99%
    34,814       7,187       18,756       37,737       123       292       98,909  
                                                         
3.00-3.99%
    2,558       9,851       22,166       253       404       -       35,233  
                                                         
4.00-4.99%
    1,592       1       119       -       -       -       1,712  
                                                         
5.00-5.99%
    -       -       -       -       -       -       -  
                                                         
Total
  $ 393,114     $ 140,122     $ 69,330     $ 46,061     $ 7,253     $ 327     $ 656,207  

The following table shows the amount of certificates of deposit of $100 thousand or more by time remaining until maturity as of December 31,2012.

   
At December 31, 2012
 
Maturity Period
 
(In thousands)
 
Within three months
  $ 42,555  
Three through six months
    29,742  
Six through twelve months
    47,688  
Over twelve months
    83,198  
    $ 203,183  


 
24

 

Borrowings. To supplement deposits as a source of funds for lending or investment, the Banks’ may borrow funds in the form of advances from the FHLBNY. At December 31, 2012, Roma Bank’s borrowing limit with the FHLBNY was $829.8 million or 50% of assets. At December 31, 2012, RomAsia Bank had an overnight borrowing capacity of $77.2 million with the FHLBNY and $2.0 million with Atlantic Central Bankers Bank.

We traditionally have enjoyed cash flows from deposit activities that were sufficient to meet our day-to-day funding obligations and in the past only occasionally used our overnight line of credit or borrowing facility with the FHLBNY. In the fourth quarter of 2005, we took a five year advance from the FHLBNY to meet the strong demand for loans. This advance was paid in full in 2010.

In the fourth quarter of 2007, Roma Bank took a ten year advance totaling $23.0 million at a fixed rate of 3.90%, callable at three years, maturing October 2017. Interest is paid quarterly. Approximately $8 million of the proceeds were used for the capital contribution to RomAsia Bank and the other $15 million of proceeds was invested in mortgage-backed securities.

In the first quarter of 2012, Roma Bank borrowed $15.0 million from the FHLBNY at a fixed rate of 1.03% amortizing over five years, maturing January 18, 2017. The balance at December 31, 2012 was $12.6 million.

In the third quarter of 2008, we entered into a securities sold under agreement to repurchase with Credit Suisse for $40.0 million, with a blended interest rate of 3.55%. We invested the proceeds into mortgage backed securities with average yields of 5.5%. The maturity dates for these borrowings are as follows: $10.0 million August 2015; $20.0 million August 2018; and, $10.0 million August 2018.

RomAsia Bank had $16.8 million of outstanding long term borrowings from the FHLBNY at December 31, 2012.

Short-term FHLBNY advances generally have original maturities of less than one year, and are typically secured by the FHLBNY stock and by other assets, mainly securities which are obligations of, or guaranteed by, the U.S. government. Additional information regarding our borrowings is included under Note 18 to the consolidated financial statements included elsewhere in this Form 10-K.

As a result of the Sterling Merger, Sterling Banks Capital trust 1, a Delaware statutory business trust became a wholly owned subsidiary of the Company (the “Trust”) and the Company assumed Sterling’s obligations in connection therewith. The Trust had issued $6.2 million of variable rate capital pass-through securities (“capital securities”) to investors. The variable interest rate reprices quarterly at the three month LIBOR plus 1.7%. The Trust purchased $6.2 million of variable rate junior subordinated debentures from Sterling Banks Inc. The debentures are the sole asset of the Trust. The fair value of the subordinated debentures at the date of the Sterling Merger was $5.1 million. On October 22, 2010, the Company repurchased $4.0 million of these capital securities, with a discounted market value of $3.2 million. In June of 2012 the remaining securities were redeemed in full.

Subsidiary Activity

Roma Financial Corporation has two direct subsidiaries, Roma Bank and RomAsia Bank. RomAsia Bank received all regulatory approvals and opened on June 23, 2008. As of December 31, 2012, the Company had invested $15.9 million in organizational capital out of total capital of $17.5 million, or 91.22% in RomAsia Bank.  At December 31, 2012, RomAsia Bank had total assets of $154.5 million.

Roma Bank has three wholly-owned subsidiaries: Roma Capital Investment Corporation, which was incorporated under New Jersey law in 2004 as an investment subsidiary, General Abstract & Title Agency, a New Jersey corporation and Roma Service Corp., a New Jersey corporation.
 
 
25

 
 

Roma Capital Investment Corporation is an investment subsidiary and its sole activity is to hold investment securities. Its total assets at December 31, 2012 were $292.8 million. Its net income for 2012 was $4.9 million.

General Abstract & Title Agency sells title insurance, performs title searches and provides real estate settlement and closing services. Its total assets at December 31, 2012 were $524 thousand. Its operating revenue for 2012 consisted of $1.2 million in premiums earned from the placement of title insurance and related title company services. Its net income for 2012 was $100 thousand.

The Company’s consolidated statements also include a 50% interest in 84 Hopewell, LLC (the “LLC), a real estate investment which is consolidated according to the requirements FASB ASC Topic 810. All significant inter-company accounts and transactions have been eliminated in consolidation.  The 50% interest in 84 Hopewell, LLC is directly owned by Roma Service Corp.

REGULATION AND SUPERVISION

Set forth below is a brief description of certain laws which relate to the regulation of the Company and the Banks. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

The Banks and the Company operate in a highly regulated industry.  This regulation establishes a comprehensive framework of activities in which a savings and loan holding company and federal savings bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors.  Set forth below is a brief description of certain laws that relate to the regulation of the Banks and the Company.  The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution and its holding company, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, including changes in the regulations governing mutual holding companies, could have a material adverse impact on the Company, the Banks and their operations.  The adoption of regulations or the enactment of laws that restrict the operations of the Banks and/or the Company or impose burdensome requirements upon one or all of them could reduce their profitability and could impair the value of the Banks’ franchises, resulting in negative effects on the trading price of the Company’s common stock.
 
Holding Company Regulation

General.  The Company is a savings and loan holding company within the meaning of Section 10 of the Home owners’ Loan Act (“HOLA”).  As a result of the Dodd-Frank Act, the Company is now required to file reports with the Federal Reserve and is subject to regulation and examination by the Federal Reserve, as successor to the OTS.  The Company must also obtain regulatory approval from the Federal Reserve before engaging in a certain transactions, such as mergers with or acquisitions of other financial institutions.  In addition, the Federal Reserve has enforcement authority over the Company and any non-savings institution subsidiaries.  This permits the Federal Reserve to restrict or prohibit activities that it determines to be a serious risk to the Banks.  This regulation is intended primarily for the protection of the depositors and not for the benefit of stockholders of the Company.

The Federal Reserve has indicated that, to the greatest extent possible taking into account any unique characteristics of savings and loan holding companies and the requirements of the HOLA, it
 
 
26

 
intends to apply its current supervisory approach to the supervision of bank holding companies to savings and loan holding companies.  The stated objective of the Federal Reserve will be to ensure the savings and loan holding company and its non-depository subsidiaries are effectively supervised and can serve as a source of strength for, and do not threaten the safety and soundness of the subsidiary depository institutions.  The Federal Reserve has generally adopted the substantive provisions of OTS regulations governing savings and loan holding companies with certain modifications as discussed below.

Activities Restrictions.  As a savings and loan holding company and as a subsidiary holding company of a mutual holding company, the Company is subject to statutory and regulatory restrictions on its business activities.  The non-banking activities of the Company and its non-savings institution subsidiaries are restricted to certain activities specified by the Federal Reserve regulation, which include performing services and holding properties used by a savings institution subsidiary, activities authorized for savings and loan holding companies as of March 5, 1987 and non-banking activities permissible for bank holding companies pursuant to the Bank Holding Company Act of 1956, as amended, or authorized for financial holding companies pursuant to the Gramm-Leach-Bliley Act.  Before engaging in any non-banking activity or acquiring a company engaged in any such activities, the Company must file with the Federal Reserve either a prior notice or (in the case of non-banking activities permissible for bank holding companies) an application regarding its planned activity or acquisition.  Under the Dodd-Frank Act, a savings and loan holding company may only engage in activities authorized for financial holding companies if they meet all of the criteria to qualify as a financial holding company. Accordingly, the Federal Reserve will require savings and loan holding companies to elect to be treated as financial holding companies in order to engage in financial holding company activities.  In order to make such an election, the savings and loan holding company and its depository institution subsidiaries must be well capitalized and well managed.

Mergers and Acquisitions.  The Company must obtain approval from the Federal Reserve before acquiring, directly or indirectly, more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation, or purchase of its assets.  Federal law also prohibits a savings and loan holding company from acquiring more than 5% of a company engaged in activities other than those authorized for savings and loan holding companies by federal law; or acquiring or retaining control of a depository institution that is not insured by the FDIC.  In evaluating an application for the Company to acquire control of a savings institution, the Federal Reserve would consider the financial and managerial resources and future prospects of the Company and the target institution, the effect of the acquisition on the risk to the insurance funds, the convenience and the needs of the community and competitive factors.

Waivers of Dividends by Roma MHC.  As permitted by OTS policies, the MHC had historically waived the receipt of dividends from the Company.  The OTS reviewed dividend waiver notices on a case-by-case basis and, in general, did not object to any such waiver if: (i) the mutual holding company’s board of directors determines that such waiver is consistent with such directors’ fiduciary duties to the mutual holding company’s members and (ii) the waiver would not be detrimental to the safe and sound operations of the subsidiary savings association.
 
The Federal Reserve’s rule on dividend waivers requires that any notice of waiver of dividends include a board resolution together with any supporting materials relied upon by the mutual holding company  board to conclude that the dividend waiver is consistent with the board’s fiduciary duties.  The resolution must include: (i) a description of the conflict of interest that exists because of a mutual holding company director’s ownership of stock in the subsidiary declaring the dividend and any actions taken to eliminate the conflict of interest, such as a waiver by the directors of their right to receive dividends; (ii) a finding by the mutual holding company that the waiver is consistent with its fiduciary duties despite any conflict of interest; (iii) an affirmation that the mutual holding company is able to meet the terms of any loan agreement for which the stock of the subsidiary is pledged or to which the mutual holding company is subject; and (iv) any affirmation that a majority of the mutual holding company’s members have
 
 
27

 
approved a waiver of dividends within the past 12 months and that the proxy statement used for such vote included certain disclosures.
 
Conversion of the MHC to Stock Form.  Federal regulations permit the MHC to convert from the mutual form of organization to the capital stock form of organization, commonly referred to as a second step conversion.  In a second step conversion a new holding company would be formed as a successor to the Company, the MHC’s corporate existence would end and certain depositors of Roma Bank would receive the right to subscribe for shares of the new holding company.  In a second step conversion, each share of common stock held by stockholders other than the MHC would be automatically converted into a number of shares of common stock of the new holding company determined pursuant to an exchange ratio that ensures that the Company’s stockholders own the same percentage of common stock in the new holding company as they owned in the Company immediately prior to the second step conversion.   The total number of shares held by the Company’s stockholders after a second step conversion also would be increased by any purchases by the Company’s stockholders in the stock offering of the new holding company conducted as part of the second step conversion.

Under the Dodd-Frank Act, waived dividends must be taken into account in determining the appropriate exchange ratio for a second-step conversion of a mutual holding company unless the mutual holding company has waived dividends prior to December 1, 2009.

Acquisition of Control.  Under the federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company.  An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or as otherwise defined by the Federal Reserve.  Under the Change in Bank Control Act, the Federal Reserve has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition.  Any company that so acquires control is then subject to regulation as a savings and loan holding company.

Holding Company Capital Requirements.  Effective as of the transfer date, the Federal Reserve was authorized to establish capital requirements for savings and loan holding companies.  These capital requirements must be countercyclical so that the required amount of capital increases in times of economical expansion and decrease in times of economic contraction, consistent with safety and soundness.  Savings and loan holding companies will also be require do serve as a source of financial strength for their depository institution subsidiaries.  Within five years after enactment, the Dodd-Frank Act requires the Federal Reserve to apply consolidated capital requirements that are no less stringent than those currently applied to depository institutions and to depository institution holding companies that were not supervised by the Federal Reserve as of May 19, 2009.  Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank or savings and loan holding company with less than $15 billion in assets.

The Federal Reserve stated that it is considering applying the same consolidated risk-based and leverage capital requirements to savings and loan holding companies as those applied to bank holding companies under Basel III to the extent reasonable and feasible taking into consideration the unique characteristics of savings and loan holding companies and requirements of the HOLA.  The Federal reserve expects these rules to be finalized in 2012 and implementation to begin in 2013.

Regulation of the Banks

General.   As federally chartered savings banks with deposits insured by the FDIC, the Banks are subject to extensive regulation by federal banking regulators.  This regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the level of the
 
 
28

 
allowance for loan losses.  The activities of federal savings banks are subject to extensive regulation including restrictions or requirements with respect to loans to one borrower, the percentage of non-mortgage loans or investments to total assets, capital distributions, permissible investments and lending activities, liquidity, transactions with affiliates and community reinvestment.  Federal savings banks are also subject to reserve requirements imposed by the Federal Reserve.  Both state and federal law regulate a federal savings bank’s relationship with its depositors and borrowers, especially in such matters as the ownership of savings accounts and the form and content of the bank’s mortgage documents.

As a result of the Dodd-Frank Act, the OCC assumed principal regulatory responsibility for federal savings banks from the OTS effective July 21, 2011.  Under the Dodd-Frank Act, all existing OTS guidance, orders, interpretations, procedures and other advisory in the effect prior to that date will continue in effect and shall be enforceable against the OCC until modified, terminated, set aside or superseded by the OCC in accordance with applicable law.  The OCC has adopted most of the substantive OTS regulations.

The Banks must file reports with the OCC concerning their respective activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions.  The OCC will regularly examine the Banks and prepare reports to the Banks’ respective Boards of Directors on deficiencies, if any, found in its operations.  The OCC will have substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements.  In addition, the FDIC has the authority to recommend to the OCC to take enforcement action with respect to a particular federally chartered savings bank, and if the OCC does not take action, the FDIC has authority to take such action under certain circumstances.

Federal Deposit Insurance.   The Banks’ deposits are insured to applicable limits by the FDIC.  Under the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased from $100,000 to $250,000 and unlimited deposit insurance was extended to non-interest-bearing transaction accounts until December 31, 2012.

The FDIC has adopted a risk-based premium system.  Starting in 2009, the FDIC significantly raised the assessment rate in order to restore the reserve ratio of the Deposit Insurance Fund to the statutory minimum of 1.15%.  The FDIC imposed a special assessment equal to five basis points of assets less Tier I capital as of June 30, 2009, payable on September 30, 2009, and reserved the right to impose special assessments.  In November 2009, instead of imposing additional special assessments, the FDIC amended the assessment regulations to require all insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30, 2009.  For purposes of estimating the future assessments, each institution’s base assessment rate in effect on September 30, 2009 was used, assuming a 5% annual growth rate in the assessment base and a 3 basis point increase in the assessment rate in 2011 and 2012.  The prepaid assessment will be applied against actual quarterly assessments until exhausted.  Any funds remaining after June 30, 2013 will be returned to the institution.

The Dodd-Frank Act required the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020.  In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion.  The Dodd-Frank Act also broadens the base for FDIC insurance assessments so that assessments are now based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured deposits.
 
The FDIC has adopted new assessment regulations that redefine the assessment base as average consolidated assets less average tangible equity.  Insured banks with more than $1.0 billion in assets must calculate quarterly average assets based on daily balances while smaller banks and new chartered banks may use weekly averages.  In the case of a merger, the average assets of the surviving bank for the quarter
 
 
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must include the average assets of the merged institution for the period in the quarter prior to the merger.  Average assets would be reduced by goodwill and other intangibles.  Average tangible equity will equal Tier 1 capital.  For institutions with more than $1.0 billion in assets average tangible equity will be calculated on a weekly basis while smaller institutions may use the quarter-end balance.  Beginning April 1, 2011, the base assessment rate for insured institutions in Risk Category 1 ranges between 5 and 9 basis points for institutions in Risk Categories II, III and IV will be 14, 23, and 35 basis points.  An institution’s assessment rate will be reduced based on the amount of its outstanding unsecured long-term debt and for institutions in Risk Categories II, III and IV may be increased based on their brokered deposits.  Risk Categories are eliminated for institutions with more than $10 billion in assets which will be assessed at a rate between 5 and 35 basis points.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the Federal Savings and Loan Insurance Corporation.  The FICO assessment rates, which are determined quarterly, averaged 0.0066% of insured deposits on an annualized basis in fiscal year 2011.  These assessments will continue until the FICO bonds mature in 2017.

Regulatory Capital Requirements.   Under the HOLA, savings institutions are required to meet three minimum capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) “Tier 1” or “core” capital equal to at least 4% of total adjusted assets and (3) risk-based capital equal to 8% of total risk-weighted assets.  For information on the Banks’ respective compliance with these regulatory capital standards, see Note 17 to Consolidated Financial Statements, included elsewhere in this Form 10-K.  In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors as well and has the authority to establish higher capital requirements for individual institutions where necessary.

In addition, the OCC may require that a savings institution that has a risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4%, or Tier 1 capital to total adjusted assets of less than 4%, to take certain action to increase its capital ratios.  If the savings institution’s capital is significantly below the minimum required levels of capital or if it is unsuccessful in increasing its capital ratios, the OCC may restrict its activities.

For purposes of these capital regulations, tangible capital is defined as core capital less all intangible assets except for certain mortgage servicing rights.  Tier 1 or core capital is defined as common stockholders’ equity (including retained earnings), non-cumulative perpetual preferred stock and related surplus, minority interest in the equity accounts of consolidated subsidiaries and certain non-withdrawable account and pledged deposits of mutual savings banks.  The Banks do not have any non-withdrawable accounts or pledged deposits.  Tier 1 or core capital is reduced by an institution’s intangible assets, with limited exceptions for certain mortgage and non-mortgage servicing rights and purchased credit card relationships.  Both core and tangible capital are further reduced by an amount equal to the savings institution’s debt and equity investments in “non-includable” subsidiaries engaged in activities not permissible for national banks other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies.

The risk-based capital standard for savings institutions requires the maintenance of total capital of 8% of risk-weighted assets.  Total capital equals the sum of core and supplementary capital.  The components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt and intermediate-term preferred stock, the portion of the allowance for loan losses not designated for specific loan losses and up to 45% of unrealized gains on equity securities.  The portion of the allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.  Overall, supplementary capital is limited to 100% of core capital.  For purposes of determining total capital, a savings institution’s
 
 
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assets are reduced by the amount of capital instruments held by other depository institutions pursuant to reciprocal arrangements and by the amount of the institution’s equity investments (other than those deducted from core and tangible capital)  and its high loan-to-value ratio land loans and commercial construction loans.

A savings institution’s risk-based capital requirement is measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight.  These risk weights generally range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans and certain other assets.