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ROMA > SEC Filings for ROMA > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for ROMA FINANCIAL CORP


9-Aug-2013

Quarterly Report


ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward - looking statements include:

Statements of our goals, intentions and expectations;
Statements regarding our business plans, prospects, growth and operating strategies;
Statements regarding the quality of our loan and investment portfolios; and
Estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

General economic conditions, either nationally or in our market area, that are worse than expected;
Changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;
Our ability to enter into new markets and/or expand product offerings successfully and take advantage of growth opportunities;
Increased competitive pressures among financial services companies;
Changes in consumer spending, borrowing and savings habits;
Legislative or regulatory changes that adversely affect our business;
Adverse changes in the securities markets;
Our ability to successfully manage our growth; and
Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board.

Any of the forward-looking statements that we make in this report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.


Comparison of Financial Condition at June 30, 2013 and December 31, 2012

General

Total assets decreased by $82.5 million to $1.71 billion at June 30, 2013 compared to $1.81 billion at December 31, 2012. Total liabilities decreased $84.1 million to $1.51 billion at June 30, 2013 compared to $1.60 billion at December 31, 2012. Total stockholders' equity increased $2.6 million to $217.2 million at June 30, 2013. The decrease in assets was a result of a decrease in the securities portfolio of $77.6 million, as the proceeds from principal repayments and calls were not reinvested, and the reduction in the deposit portfolio of $76.7 million.

Deposits

Total deposits decreased $76.7 million to $1.41 billion at June 30, 2013, compared to $1.48 billion at December 31, 2012. Non-interest bearing demand deposits increased $7.6 million to $78.9 million at June 30, 2013, and interest bearing demand deposits decreased $5.1 million to $238.38 million. Savings and club accounts decreased $6.3 million to $507.4 million, and certificates of deposit decreased $72.9 million to $583.3 million at June 30, 2013. The Company has continued to lower deposit rates to control interest margin.

Investments (Including Mortgage-Backed Securities)

The investment portfolio decreased $77.6 million to $422.5 million at June 30, 2013, compared to $500.1 million at December 31, 2012. Securities available for sale decreased $2.7 million to $26.2 million at June 30, 2013, compared to $28.9 million at December 31, 2012, primarily due to calls and principal repayments. Investments held to maturity decreased $31.0 million to $96.9 million at June 30, 2013, compared to $127.9 million at December 31, 2012, primarily due to calls. Mortgage-backed securities decreased $43.9 million to $299.4 million at June 30, 2013, compared to $343.3 million at December 31, 2012.

Loans

Net loans decreased by $13.2 million to $1.024 billion at June 30, 2013, compared to $1.037 billion at December 31, 2012. Commercial and multi-family real estate mortgages decreased $12.0 million to $309.6 million at June 30, 2013 compared to $321.6 million at December 31, 2012. The decline in the portfolio was primarily a result of scheduled amortized principal repayments Gross construction loans increased $1.2 million to $27.2 million at June 30, 2013, compared to $26.0 million at December 31, 2012. Residential and consumer loans increased $2.1 million from December 31, 2012 to June 30, 2012.

Other Assets

All other asset categories, except cash and cash equivalents, decreased by $2.9 million from December 31, 2012 to June 30, 2013. This decrease was primarily caused by the reduction in the real estate owned portfolio and a decrease in the deferred tax asset.

Federal Home Loan Bank of New York Advances

The $5.1 million decrease in FHLBNY advances during the six months ended June 30, 2013 was due to principal repayments. At June 30 2013, outstanding FHLBNY advances were $47.3 million, compared to $52.4 million at December 31, 2012.

Other Liabilities

Other liabilities decreased $2.6 million to $15.5 million at June 30, 2013. The net decrease was result of many small decreases in various categories.

Stockholders' Equity

Stockholders' equity increased $1.6 million to $217.2 million at June 30, 2013 compared to $215.6 million at December 31, 2012. The net increase was primarily caused by net income of $1.0 million.

Comparison of Operating Results for the Three Months Ended June 30, 2013 and 2012

General

Net income decreased $1.3 million to a net loss of $355 thousand for the quarter ended June 30, 2013, compared to net income of $896 thousand. The decrease is primarily related to a $631 thousand decline in net interest income, a $655 decline in non-interest income, merger expenses of $672 thousand and a loss on returned checks of $1.8 million. Offsetting these items were a $1.0 million decrease in the provision for loan loss, a $745 thousand decrease in other non-interest expense, and a decrease in income taxes of $727 thousand.

Interest Income

Interest income decreased by $1.9 million to $14.9 million for the three months ended June 30, 2013 compared to $16.8 million for the prior year period. The decrease was primarily caused by a decrease of $535 thousand in interest income from investments securities and a decrease of $1.2 million in interest income from mortgage-backed securities. The Company has experienced significant security calls over the last eighteen months since January 1, 2012. Because the demand for commercial loans continues to be sluggish, and the majority of the thirty year mortgages are being sold, proceeds from called securities are being reinvested in shorter term securities at much lower yields or held in overnight funds. Interest income from loans decreased $242 thousand to $11.6 million for the three months ended June 30, 2013. Interest income from residential mortgage loans increased $801 thousand over the comparable quarter ended June 30, 2012, while interest income from equity loans decreased $564 thousand. The weighted average interest rates for mortgage and equity loans at June 30, 2013 were 4.24% and 4.40%, respectively, compared to 4.79% and 4.65%, respectively, in the prior year. Interest income from commercial and multifamily mortgage loans and commercial and industrial loans decreased $974 thousand from period to period. The weighted average interest rate for commercial and multi-family mortgage loans and commercial loans was 5.04% at June 30, 2013, and 5.50% at June 30, 2012. Loan fees increased by $149 thousand.

Interest Expense

Interest expense decreased $1.3 million for the three month period ended June 30, 2013 to $2.9 million compared to $4.2 million for the three months ended June 30, 2012. The decrease was primarily due to a $1.0 million decrease in interest paid on deposits. Total deposits have decreased by $105.4 million over the twelve month period ended June 30, 2013. The Company has continued to lower rates to better manage interest margins since the beginning of 2012; the weighted average interest rate has decreased 19 basis points to 0.61% at June 30, 2013, compared to 0.80% at June 30, 2012. Interest expense on borrowed funds decreased $295 thousand to $652 thousand.

Provision for Loan Losses

The loan loss provision for the three months ended June 30, 2013 decreased $1.0 million to $344 thousand. The decrease in the provision is primarily related to a decrease in the allowance methodology environmental factor relating to risk rating based on an improvement in the risk rating migration, fewer charge offs, and loan growth.

Total non-performing loans were $42.4 million and $47.9 million at June 30, 2013 and December 31, 2012, respectively. The legacy Roma and RomAsia non-performing loans were $28.3 million and $22.9 million at June 30, 2013 and December 31, 2012, respectively. The allowance for loan losses to non-performing legacy Roma and RomAsia loans was 31.5% and 27.4% at June 30, 2013 and December 31, 2012, respectively, and allowance for loan loss to total legacy Roma and RomAsia loans represented 0.98% and 0.95%, respectively, for the same periods of time. Total loans are net of $6.8 million and $8.9 million of credit marks on the acquired loans at June 30, 2013 and December 31, 2012, respectively. Total allowance for loan loss and credit marks were 1.48% and 1.63% of total gross loans at June 30, 2013 and December 31, 2012.

Management believes that the impaired loans remain sufficiently collateralized and where needed, appropriate charge offs have occurred, or credit marks, have been established. The Company is taking a proactive approach in identifying loans at an early stage that may be experiencing cash flow deterioration or collateral weakening even though the loan remains current. The Company obtains new appraisals at least annually on substandard assets.

Non-Interest Income

Non-interest income decreased $655 thousand to $1.4 million for the three months ended June 30, 2013, compared to $2.1 million for the three months ended June 30, 2012. The net decrease was chiefly due to decreases in: gains on sale of mortgage loans of $257 thousand; income from bank owned life insurance of $11 thousand; commissions on the sale of title policies of $24 thousand; gain on sale of securities of $13; fees and service charges on loans and deposits of $144 thousand, realized loss on real estate owned of $92 thousand and, $110 thousand in other non-interest income primarily related to mortgage servicing rights income and ATM fees.


Non-Interest Expense

Non-interest expense increased $1.7 thousand to $13.8 million for the three months ended June 30, 2013 compared to $12.1 million for the three months ended June 30, 2012. The two largest increases were in $1.8 million loss on returned checks and $672 thousand of merger costs. Roma Bank was the victim of a check kiting scheme by one of its commercial deposit and loan customers. The loss before tax was approximately $1.8 million, net of a $259 thousand insurance recovery. The Bank is aggressively pursuing collection of the loss from the customer and with the appropriate authorities, however, the timing and potential results of these efforts are uncertain. Salaries and employee benefits decreased $236 thousand to $6.1 million for the three months ended June 30, 2013, compared to the same period in the prior year. This decrease is reflective of a decline in overall FTEs from June 30, 2012 to June 30, 2013 of 48. Net occupancy of premises expense decreased $45 thousand for the three month period ended June 30, 2013. Loan expense for commercial and mortgage loans increased $132 thousand from period to period primarily related to the costs associated with redeeming tax certificates and collection costs on impaired loans. Other non-interest expenses increased by $644 thousand to $1.3 million for the three months ended June 30, 2013, compared to $2.0 million for the same period in the prior year.

Provision for Income Taxes

Income tax expense decreased by $727 thousand to a net tax benefit of $393 thousand for the three months ended June 30, 2013, compared to an expense of $334 thousand for the three months ended June 30, 2012, due to the net loss in 2013. Income tax expense represented an effective rate of (54.5)% for the three months ended June 30, 2013, compared to 26.7% in the prior year quarter. The Company pays a state tax rate of 3.6% on the taxable income of the Investment Company and 9.0 % on the taxable income of the other entities.

Comparison of Operating Results for the Six Months Ended June 30, 2013 and 2012

General

Net income declined $1.3 million to $1.0 million for the six months ended June 30, 2013, compared to $2.3 million for the prior year period. The decrease was primarily related to a decline in interest income of $4.0 million, a decline in non-interest income of $713 thousand, a loss of $1.8 million on returned checks and $953 thousand of merger expenses offset by decreases in interest expense of $2.6 million, provision for loan losses of $2.4 million and income taxes of $491 thousand.

Interest Income

Interest income decreased by $4.0 million to $30.4 million for the six months ended June 30, 2013, compared to $34.5 million for the prior year period. The decrease was primarily caused by a decrease of $3.8 million in interest income from investments. The Company has experienced significant security calls since January 1, 2012. Because the demand for commercial loans continues to be sluggish, and the majority of the thirty year mortgages are being sold, proceeds from called securities are being reinvested in shorter term securities at much lower yields or in overnight funds. Interest income from loans decreased $283 thousand to $23.6 million for the six months ended June 30, 2013. Interest income from residential mortgage loans increased $555 thousand over the comparable six months ended June 30, 2012, while interest income from equity loans decreased $517 thousand. The weighted average interest rates for mortgage and equity loans at June 30, 2013 were 4.24% and 4.40%, respectively, compared to 4.79% and 4.65%, respectively, in the prior year. Interest income from commercial and multifamily mortgage loans and commercial and industrial loans decreased $510 thousand from period to period. The weighted average interest rate for commercial and multi-family mortgage loans and commercial loans was 5.04% at June 30, 2013, and 5.50% at June 30, 2012. Loan fees increase by $189 thousand.

Interest income from mortgage-backed securities decreased $1.3 million over the comparable six months in 2012. The decrease was primarily due to a decrease in yields. Interest income from investments held to maturity decreased $2.5 million for the six months ended June 30, 2013. This decrease was primarily due to a decrease in the portfolio from year to year and the reinvestment of the proceeds of called securities into lower yielding investments. Interest income on securities available for sale decreased $26 thousand from period to period.


Interest Expense

Interest expense decreased $2.6 million for the six month period ended June 30, 2013 to $5.9 million compared to $8.5 million for the six months ended June 30, 2012. The decrease was primarily due to a $2.3 million decrease in interest paid on deposits. Total deposits have decreased by $105.4 million over the twelve month period ended June 30, 2013. The Company has continued to lower rates to better manage interest margins over the last several months; the weighted average interest rate has decreased 19 basis points to 0.61% at June 30, 2013, compared to 0.80% at June 30, 2012.

Provision for Loan Losses

The loan loss provision for the six months ended June 30, 2013 decreased $2.4 million to $202 thousand. The decrease in the provision is primarily related to a decrease in the allowance methodology environmental factor relating to risk rating migration, lower charge offs, and loan portfolio growth.

Total non-performing loans were $42.4 million and $47.9 million at June 30, 2013 and December 31, 2012, respectively. The legacy Roma and RomAsia non-performing loans were $28.3 million and $22.9 million at June 30, 2013 and December 31, 2012, respectively. The allowance for loan losses to non-performing legacy Roma and RomAsia loans was 31.5% and 27.4% at June 30, 2013 and December 31, 2012, respectively, and allowance for loan loss to total legacy Roma and RomAsia loans represented 0.98% and 0.95%, respectively, for the same periods of time. Total loans are net of $6.8 million and $8.9 million of credit marks on the acquired loans at June 30, 2013 and December 31, 2012, respectively. Total allowance for loan loss and credit marks were 1.48% and 1.63% of total gross loans at June 30, 2013 and December 31, 2012.

In June 2012 management sold the note related to an impaired loan which resulted in a charge off to the allowance for loan losses of approximately $840 thousand. Management made the decision to sell the note after evaluating the estimated costs to maintain and operate the property over the next year, which were not significantly different than the loss taken. Prior to the decision to sell the note, current appraisals and a broker's opinion of value were sufficient to cover the note balance.

Management believes that the impaired loans remain sufficiently collateralized and where needed, appropriate charge offs have occurred, or credit marks, have been established. The Company is taking a proactive approach in identifying loans at an early stage that may be experiencing cash flow deterioration or collateral weakening even though the loan remains current. The Company obtains new appraisals at least annually on substandard assets.

Non-Interest Income

Non-interest income decreased $713 thousand to $3.1 million for the six months ended June 30, 2013, compared to $3.8 million for the six months ended June 30, 2012. The net decrease was chiefly due to decreases in: gain on sale of mortgage loans of $314 thousand; income from bank owned life insurance of $22 thousand; $12 thousand in gain on sale of securities; $285 on fees and charges; $24 thousand in commissions on sales of title policies; gains on sale of available for sale securities of $12 thousand, realized losses on real estate owned of $504 thousand, and, $136 thousand in other non-interest income primarily related to gains on calls of securities, mortgage servicing rights income and ATM fees, offset by an increase in the gain on sale of real estate held for sale of $584 thousand.

Non-Interest Expense

Non-interest expense increased $2.1 million to $25.8 million for the six months ended June 30, 2013, compared to $23.8 million for the six months ended June 30, 2012. The most significant changes in non-interest expense for the comparable six month periods were merger expenses of $953 thousand and a loss on returned checks of $1.8 million. Roma Bank was the victim of a check kiting scheme by one of its commercial deposit and loan customers. The loss before tax was approximately $1.8 million, net of a $250 thousand insurance recovery, and after taxes approximately $1.1 million. The Bank is aggressively pursuing collection of the loss from the customer and with the appropriate authorities, however, the timing and potential results of these efforts are uncertain.

Salaries and employee benefits, net occupancy expense and equipment expense all changed less than $50 thousand for the comparable six month periods. Overall FTEs decreased by 48 from year to year. Federal Deposit Insurance Premiums increased $311 thousand for the six months ended June 30, 2013 compared to the same period in 2012. Commercial and residential loan expense decreased $534 thousand as costs associated with redeeming tax certificates and collection costs declined. Other non-interest expenses decreased $414 thousand from year to year.


Provision for Income Taxes

Income tax expense decreased by $491 thousand to $470 thousand for the six months ended June 30, 2013 compared to $961 thousand for the six months ended June 30, 2012 primarily as a result of lower pre-tax income. Income tax expense represented an effective rate of 30.6% for the six months ended June 30, 2013, compared to 28.7% in the prior year nine months. The Company pays a state tax rate of 3.6% on the taxable income of our investment company and 9.0 % on the taxable income of the other entities.

Agreement with the OCC

On September 21, 2012, Roma Bank entered into an agreement with the Office of the Comptroller of the Currency (the "OCC Agreement"), Roma Bank's primary regulator. The OCC Agreement requires Roma Bank to take certain actions, including, but not limited to:

Establishing a compliance committee to oversee Roma Bank's obligations under the OCC Agreement and to prepare and submit written progress reports to the OCC on a periodic basis regarding Roma Bank's compliance with the terms of the OCC Agreement;
Completing a review of the Board's processes regarding oversight of management and risk management and adopting and implementing a plan, acceptable to the OCC to strengthen oversight of management and operations;
Adopting a plan, acceptable to the OCC, to strengthen Roma Bank's credit risk management practices;
Adopting and implementing a program, acceptable to the OCC, for the maintenance of an adequate allowance for loan and lease losses;
Adopting and implementing a program, acceptable to the OCC, to reduce Roma Bank's interest in criticized or classified assets;
Adopting and implementing an updated program, acceptable to the OCC, to ensure Roma Bank's compliance with the Bank Secrecy Act and to ensure implementation of a Bank Secrecy Act/Anti-Money laundering Risk Assessment Process;
Adopting, implementing and ensuring compliance with an independent internal audit program acceptable to the OCC, and;
Establishing a committee to ensure oversight of the Bank's information technology activities.

As of June 30, 2013, Roma Bank has complied with the terms of the OCC Agreement and met all timelines established in the OCC Agreement.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policy upon which our financial condition and results of operation depend, and which involves the most complex subjective decisions or assessments, is the allowance for loan losses.

Allowance for Loan Losses

The allowance for loan losses represents our best estimate of losses known and inherent in our loan portfolio that are both probable and reasonable to estimate. In determining the amount of the allowance for loan losses, we consider the losses inherent in our loan portfolio and changes in the nature and volume of our loan activities, along with general economic and real estate market conditions. We utilize a segmented approach which identifies: (1) impaired loans for which specific reserves are established; (2) classified loans for which a higher allowance is established; and (3) performing loans for which a general valuation allowance is established. We maintain a loan review system which provides for a systematic review of the loan portfolios and the early identification of impaired loans. The review of residential real estate and home equity consumer loans, as well as other more complex loans, is triggered by identified evaluation factors, including delinquency status, size of loan, type of collateral and the financial condition of the borrower. All commercial loans are evaluated individually for impairment. Specific loan loss allowances are established for impaired loans based on a review of such information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment.

Although general loan loss allowances are established in accordance with management's best estimate, actual losses are dependent upon future events, and as such, further provisions for loan losses may be necessary in order to increase the level of the allowance for loan losses. For example, our evaluation of the allowance includes consideration of current economic conditions, and a change in economic conditions could reduce the ability of borrowers to make timely repayments of their loans. This could result in increased delinquencies and increased non-performing loans, and thus a need to make increased provisions to the allowance for loan losses. Any such increase in provisions would result in a reduction to our earnings. A change in economic conditions could also adversely affect the value of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced recoveries, and require increased provisions to the allowance for loan losses. Furthermore, a change in the composition, or growth, of our loan portfolio could result in the need for additional provisions.


Acquired Loans

Loans that we acquire in acquisitions subsequent to January 1, 2009, are recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount or premium and is recognized into interest income over the remaining life of the loan. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require us to evaluate the need for an allowance for credit losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which we then reclassify as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect is performed in a similar manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment.

New Accounting Pronouncements

In June 2013, the FASB issued ASU No. 2013-08, Financial Services-Investment Companies (Topic 946); Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this update modify the guidance for determining whether an entity is an investment company, update the measurement requirements for noncontrolling interests in other investment companies and require additional disclosures for investment companies under US GAAP. The amendments in the update develop a two-tiered approach for the assessment of whether an entity is an investment company which requires an entity to possess certain fundamental characteristics while allowing judgment in assessing other typical characteristics. The amendments in the update also revise the measurement guidance in Topic 946 such that investment companies must measure non . . .

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