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ROMA > SEC Filings for ROMA > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ROMA FINANCIAL CORP

Form 10-Q for ROMA FINANCIAL CORP


12-Nov-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:

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 September 30, 2013 and December 31, 2012

General

Total assets decreased by $136.6 million to $1.68 billion at September 30, 2013 compared to $1.81 billion at December 31, 2012. Total liabilities decreased $139.6 million to $1.46 billion at September 30, 2013 compared to $1.60 billion at December 31, 2012. Total stockholders' equity increased $3.0 million to $218.6 million at September 30, 2013. The decrease in assets was a result of a decrease in the mortgage-backed and investment securities portfolios of $102.4 million, as the proceeds from principal repayments and calls were not reinvested, and the reduction in the deposit portfolio of $131.5 million.

Deposits

Total deposits decreased $131.5 million to $1.35 billion at September 30, 2013, compared to $1.48 billion at December 31, 2012. Non-interest bearing demand deposits increased $5.2 million to $76.5 million at September 30, 2013, and interest bearing demand deposits decreased $550 thousand to $242.8 million. Savings and club accounts decreased $20.2 million to $493.5 million, and certificates of deposit decreased $115.6 million to $540.2 million at September 30, 2013. The Company has continued to lower deposit rates to control liquidity and net interest margin.


Investments (Including Mortgage-Backed Securities)

The investment portfolio decreased $102.4 million to $397.7 million at September 30, 2013, compared to $500.1 million at December 31, 2012. Securities available for sale decreased $4.07 million to $24.9 million at September 30, 2013, compared to $28.9 million at December 31, 2012, primarily due to calls and principal repayments. Investments held to maturity decreased $33.2 million to $94.7 million at September 30, 2013, compared to $127.9 million at December 31, 2012, primarily due to calls. Mortgage-backed securities decreased $65.2 million to $278.1 million at September 30, 2013, compared to $343.3 million at December 31, 2012.

Loans

Net loans decreased by $15.4 million to $1.02 billion at September 30, 2013, compared to $1.04 billion at December 31, 2012. Commercial and multi-family real estate mortgages decreased $7.2 million to $314.4 million at September 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 decreased $8.2 million to $17.8 million at September 30, 2013, compared to $26.0 million at December 31, 2012, primarily because loans converted to permanent mortgages. Residential and consumer loans increased $2.8 million from December 31, 2012 to September 30, 2013.

Other Assets

All other asset categories, except cash and cash equivalents, decreased by $4.4 million from December 31, 2012 to September 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 nine months ended September 30, 2013 was due to principal repayments. At September 30 2013, outstanding FHLBNY advances were $46.4 million, compared to $52.4 million at December 31, 2012.

Other Liabilities

Other liabilities decreased $2.1 million to $19.5 million at September 30, 2013. The net decrease was result of many small decreases in various categories.

Stockholders' Equity

Stockholders' equity increased $3.0 million to $218.6 million at September 30, 2013 compared to $215.6 million at December 31, 2012. The net increase was primarily caused by net income of $2.1 million.

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

General

Net income increased $762 thousand to $1.1 million for the quarter ended September 30, 2013, compared to net income of $345 thousand for the prior year period. The increase is primarily related to a reduction in the provision for loan loss of $2.9 million, and a reduction in non-interest expense of $628 thousand. Offsetting these items were a $622 thousand decrease in net interest income, and a $1.5 million decrease in non-interest income.

Interest Income

Interest income decreased by $1.5 million to $14.4 million for the three months ended September 30, 2013 compared to $15.9 million for the prior year period. The decrease was primarily caused by a decrease of $1.1 million in interest income from mortgage-backed securities and a decrease of $308 thousand in interest income from investment securities. The Company has experienced significant security calls over the last 21 months since January 1, 2012. Because the demand for commercial loans continues to be sluggish, and the refinance boom in residential mortgages has slowed, 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 $122 thousand to $11.4 million for the three months ended September 30, 2013. Interest income from residential mortgage loans increased $44 thousand over the comparable quarter ended September 30, 2012, while interest income from equity loans decreased $282 thousand. The weighted average interest rates for mortgage and equity loans at September 30, 2013 were 4.18% and 4.37%, respectively, compared to 4.61% and 4.59%, respectively, in the prior year. Interest income from commercial and multifamily mortgage loans and commercial and industrial loans decreased $166 thousand from period to period. The weighted average interest rate for commercial and multi-family mortgage loans and commercial loans was 4.86% at September 30, 2013, and 4.65% at September 30, 2012. Loan fees decreased by $47 thousand.


Interest Expense

Interest expense decreased $916 thousand for the three month period ended September 30, 2013 to $2.7 million compared to $3.6 million for the three months ended September 30, 2012. The decrease was primarily due to a $1.2 million decrease in interest paid on deposits. Total deposits have decreased by $139.4 million over the twelve month period ended September 30, 2013. The Company has continued to lower rates to better manage liquidity and interest margins since the beginning of 2012; the weighted average interest rate has decreased 17 basis points to 0.57% at September 30, 2013, compared to 0.74% at September 30, 2012. Interest expense on borrowed funds increased $300 thousand to $654 thousand.

Provision for Loan Losses

The loan loss provision for the three months ended September 30, 2013 decreased $2.9 million to a benefit of $122 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 minimal loan growth. The reduction in the provision for construction loans is related to $8.2 million of those loans converting to permanent mortgage loans on which the basis point factor is less than on construction loans.

Total non-performing loans were $45.1 million and $47.3 million at September 30, 2013 and December 31, 2012, respectively. The legacy Roma and RomAsia non-performing loans were $30.2 million and $22.9 million at September 30, 2013 and December 31, 2012, respectively. The allowance for loan losses to non-performing legacy Roma and RomAsia loans was 28.6% and 27.4% at September 30, 2013 and December 31, 2012, respectively, and allowance for loan loss to total legacy Roma and RomAsia loans represented 0.96% and 0.95%, respectively, for the same periods of time. Total loans are net of $6.2 million and $8.9 million of credit marks on the acquired loans at September 30, 2013 and December 31, 2012, respectively. Total allowance for loan loss and credit marks were 1.41% and 1.63% of total gross loans at September 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 $1.5 million to $1.0 million for the three months ended September 30, 2013, compared to $2.5 million for the three months ended September 30, 2012. The net decrease was chiefly due to decreases in: gains on sale of mortgage loans of $752 thousand on lower loan rates; income from bank owned life insurance of $13 thousand due to interest rate and mortality charges; commissions on the sale of title policies of $79 thousand sue to lower loan activity; gain on sale of securities of $407 thousand; fees and service charges on loans and deposits of $110 thousand, and, $224 thousand in other non-interest income primarily related to mortgage servicing rights income and ATM fees. The decreases were offset by a decrease in the realized loss on real estate owned of $111 thousand.

Non-Interest Expense

Non-interest expense decreased $628 thousand to $11.0 million for the three months ended September 30, 2013 compared to $11.6 million for the three months ended September 30, 2012. Salaries and employee benefits decreased $463 thousand to $5.9 million for the three months ended September 30, 2013, compared to the same period in the prior year. This decrease is reflective of a decline in overall FTEs from September 30, 2012 to September 30, 2013. Net occupancy of premises expense decreased $7 thousand for the three month period ended September 30, 2013. Equipment costs decreased $84 thousand from period to period. Loan expense for commercial and mortgage loans decreased $299 thousand from period to period primarily due to fewer costs associated with redeeming tax certificates and collection costs on impaired loans. Other non-interest expense categories decreased $305 thousand. Merger expense increased $356 thousand from period to period. FDIC expense and data processing costs increased $158 thousand and $22 thousand, respectively. Other non-interest expenses increased by $644 thousand to $1.3 million for the three months ended September 30, 2013, compared to $3.4 million for the same period in the prior year.

Provision for Income Taxes

Income tax expense increased by $653 thousand to $775 thousand for the three months ended September 30, 2013, compared to an expense of $122 thousand for the three months ended September 30, 2012. The increase is primarily related to the higher income before income taxes and merger costs which are not fully deductible. Income tax expense represented an effective rate of 40.8% for the three months ended September 30, 2013, compared to 24.8% 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 Nine Months Ended September 30, 2013 and 2012

General

Net income declined $528 thousand to $2.1 million for the nine months ended September 30, 2013, compared to $2.8 million for the prior year period. The decrease was primarily related to merger cost of $1.3 million and loss on returned items of $1.8 million. Net interest income and non-interest income decrease $2.1 million and $2.2 million, respectively. Non-interest expense increased $1.5 million from period to period, primarily because of the $3.1 million increase in merger cost and loss on returned checks. Without these two items non-interest expense decreased $1.6 million.

Interest Income

Interest income decreased by $5.6 million to $44.8 million for the nine months ended September 30, 2013, compared to $50.4 million for the prior year period. The decrease was primarily caused by a decrease of $5.2 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 refinance boom in residential mortgages has ended, proceeds from called securities are being reinvested in shorter term securities at much lower yields or in overnight funds. Interest income from loans decreased $405 thousand to $35.0 million for the nine months ended September 30, 2013. Interest income from residential mortgage loans decreased $72 thousand over the comparable nine months ended September 30, 2012, while interest income from equity loans decreased $89 thousand. The weighted average interest rates for mortgage and equity loans at September 30, 2013 were 4.18% and 4.37%, respectively, compared to 4.61% and 4.59%, respectively, in the prior year. Interest income from commercial and multifamily mortgage loans and commercial and industrial loans increased $211 thousand from period to period. The weighted average interest rate for commercial and multi-family mortgage loans and commercial loans was 4.86% at September 30, 2013, and 4.65% at September 30, 2012. Loan fees increased by $189 thousand.

Interest income from mortgage-backed securities decreased $3.6 million over the comparable nine months in 2012. The decrease was primarily due to a decrease in yields. Interest income from investments held to maturity decreased $1.6 million for the nine months ended September 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 or overnight funds.. Interest income on securities available for sale decreased $25 thousand from period to period.

Interest Expense

Interest expense decreased $3.5 million for the nine month period ended September 30, 2013 to $8.6 million compared to $12.1 million for the nine months ended September 30, 2012. The decrease was primarily due to a $3.5 million decrease in interest paid on deposits. Total deposits have decreased by $139.4 million over the twelve month period ended September 30, 2013. The Company has continued to lower rates to better manage liquidity and interest margins over the last year; the weighted average interest rate has decreased 17 basis points to 0.57% at September 30, 2013, compared to 0.74% at September 30, 2012.

Provision for Loan Losses

The loan loss provision for the nine months ended September 30, 2013 decreased $5.3 million to $80 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 lower levels of loan portfolio growth. The reduction in the provision for construction loans is related to $8.2 million of those loans converting to permanent mortgage loans on which the basis point factor is less than on construction loans.


Total non-performing loans were $45.1 million and $47.3 million at September 30, 2013 and December 31, 2012, respectively. The legacy Roma and RomAsia non-performing loans were $30.2 million and $22.9 million at September 30, 2013 and December 31, 2012, respectively. The allowance for loan losses to non-performing legacy Roma and RomAsia loans was 28.6% and 27.4% at September 30, 2013 and December 31, 2012, respectively, and allowance for loan loss to total legacy Roma and RomAsia loans represented 0.96% and 0.95%, respectively, for the same periods of time. Total loans are net of $6.2 million and $8.9 million of credit marks on the acquired loans at September 30, 2013 and December 31, 2012, respectively. Total allowance for loan loss and credit marks were 1.41% and 1.63% of total gross loans at September 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 $2.2 million to $4.1 million for the nine months ended September 30, 2013, compared to $6.3 million for the nine months ended September 30, 2012. The net decrease was chiefly due to decreases in: gain on sale of mortgage loans of $1.1 million; income from bank owned life insurance of $35 thousand; $419 thousand in gain on sale of available for sale securities; $395 on fees and charges; $103 thousand in commissions on sales of title policies; realized losses on real estate owned of $393 thousand, and, $360 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 $1.5 million to $36.8 million for the nine months ended September 30, 2013, compared to $35.3 million for the nine months ended September 30, 2012. The most significant changes in non-interest expense for the comparable nine month period were merger expenses of $1.3 million 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 decreased $493 thousand from period to period. Net occupancy expense, equipment expense and data processing costs all changed less than $50 thousand for the comparable nine month periods. Overall FTEs decreased by 28 from year to year. Federal Deposit Insurance Premiums increased $469 thousand for the nine months ended September 30, 2013 compared to the same period in 2012. Commercial and residential loan expense decreased $833 thousand as costs associated with redeeming tax certificates and collection costs declined. Other non-interest expenses decreased $719 thousand from year to year.

Provision for Income Taxes

Income tax expense increased by $162 thousand to $1.2 million for the nine months ended September 30, 2013 compared to $1.1 million for the nine months ended September 30, 2012 primarily as a result of merger expenses not being fully deductible. Income tax expense represented an effective rate of 36.3% for the nine months ended September 30, 2013, compared to 28.2% 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 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.

While we are subject to the OCC Agreement, we expect that our management and board of directors will be required to focus considerable time and attention on taking corrective actions to comply with its terms. There also is no assurance that we will successfully address the OCC's concerns in the OCC Agreement or that we will be able to fully comply with the OCC Agreement. If we do not fully comply with the OCC Agreement, the Bank would be subject to further regulatory actions including enforcement actions. As of September 30, 2013, Roma Bank believes that it has complied with the terms of the agreement and met all timelines established in the 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 . . .

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