ROMA FINANCIAL CORP ROMA
December 18, 2010 - 12:57pm EST by
sea946
2010 2011
Price: 9.40 EPS $0.19 $0.24
Shares Out. (in M): 30 P/E 0.0x 0.0x
Market Cap (in $M): 286 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • mutual holding company
  • Demutualization

Description

Thrift conversion: Robbinsville, New Jersey-based Roma Financial is the parent of Roma Bank, a federally-chartered stock savings bank founded in 1920 with $1.5 billion in deposits. The parent company is 73%-owned by an MHC, implying that the economics attributable to non-MHC shareholders are more attractive than they initially appear. When adjusting for the MHC ownership and the post-Q2 acquisition of roughly $370 million in assets from troubled Sterling Bank, Roma trades at a market value to total asset ratio of 4% ("true" market value of $77 million divided by total assets of $1.8 billion). We find this valuation attractive for a well-capitalized, well-managed bank in New Jersey. Tangible book value is $214 million.
 
Roma has remained profitable throughout the crisis and is not subject to a regulatory order. The bank pays a quarterly dividend of $0.08 per share for a dividend yield of 3.3%. It has also been buying back stock at prices well below estimated fair value. We view the investment case as compelling.

INVESTMENT HIGHLIGHTS

  • 73% of common stock held by Roma Financial Corp., MHC. The economics of these shares belong entirely to the holders of the other 27% of Roma stock, creating a situation in which "true" intrinsic value may be higher than "apparent" value.
  • Second-step conversion may unlock value. Roma will likely wait with a conversion until it can sell the MHC shares at a price exceeding the recent price.
  • Acquired Sterling Bank for $15 million in July. Sterling had deposits of $331 million, loans of $287 million, and tangible book of $16 million. The deal expands Roma's network from 14 to 24 branches in Mercer, Burlington, Camden and Ocean Counties. The integration has been "successfully achieved." 
  • Post-merger capital "strong," as confirmed by continued dividend payments at rate of $0.08 per share per quarter, implying a 3% annualized yield.
  • New buyback suggests management is aware of and not satisfied with undervaluation. Roma authorized the "very attractive" repurchase of 5% of the non-MHC shares in September. The company had purchased 170K shares at $12 per share in Q2.
  • "True" market value of $77 million, implying MV to assets ratio of less than 4%. If Roma earns a 1% spread on assets, it will trade at 4x earnings.

INVESTMENT RISKS & CONCERNS

  • Continued declines in real estate prices would strain Roma's balance sheet, potentially forcing the company to pursue a second-step conversion at an unfavorable exchange ratio, resulting in dilution.
  • Relatively low insider ownership.

 

SELECTED OPERATING DATA

FYE December 31

2006

2007

2008

2009

1H10

Total assets ($mn)

876

907

1,077

1,312

1,457

   Change (y-y)

10%

4%

19%

22%

17%

Selected items as % of assets:

 

 

 

 

Cash equivalents

7%

11%

7%

4%

10%

Investment securities

22%

16%

8%

26%

22%

Mortgage-backed securities

17%

16%

28%

19%

19%

Loans, net

48%

51%

48%

45%

42%

Real estate owned

0%

0%

0%

0%

0%

Other assets

6%

7%

7%

7%

6%

Deposits: Noninterest bearing

3%

3%

3%

2%

3%

Deposits: Interest checking

11%

11%

9%

10%

9%

Deposits: Savings and club

21%

19%

19%

21%

22%

Deposits: CDs

36%

39%

40%

44%

43%

Other liabilities

2%

4%

9%

6%

9%

Total liabilities

73%

76%

80%

84%

85%

Common equity

27%

24%

20%

16%

15%

Selected income statement data ($mn):

 

 

 

Interest income

41

46

48

55

30

Interest expense

(15)

(18)

(20)

(22)

(10)

Loan loss provision

(0)

(1)

(1)

(3)

(2)

Non-interest income

4

4

4

3

3

Non-interest expense

(21)

(20)

(25)

(29)

(16)

Pretax income

8

11

7

4

5

Pretax pre-provision income

8

12

8

7

7

Selected performance ratios:

 

 

 

 

 

Return on average assets

.6%

.8%

.5%

.2%

.4%

Return on average equity

2.9%

3.1%

2.2%

1.2%

1.4%

Net interest margin

3.3%

3.4%

3.2%

2.9%

3.3%

Efficiency ratio 1

72.8%

63.4%

79.0%

89.6%

70.9%

Breakdown of loan portfolio (period end):

 

 

 

Conventional 1-4 family

48%

47%

44%

42%

42%

Commercial and multi-family

15%

17%

24%

29%

29%

Construction

6%

8%

5%

4%

4%

Home equity

30%

28%

25%

22%

22%

Consumer loans

0%

0%

0%

0%

0%

Business loans

1%

1%

1%

2%

3%

Selected troubled loan statistics (period end):

 

 

 

Non-performing loans / loans

.1%

1.5%

2.0%

2.5%

3.3%

Non-performing loans / assets

.0%

.8%

1.0%

1.1%

1.4%

Non-perform. assets / assets

.0%

.8%

1.0%

1.3%

1.6%

Loan loss allowance / loans

.3%

.3%

.4%

.9%

1.2%

Allowance / troubled loans

322%

23.3%

21.4%

35.4%

35.8%

change in shares out

21%

16%

-3

0%

0%

1 Efficiency ratio is calculated as non-interest expenses divided by the sum of net interest income and non-interest income.

 
THRIFT CONVERSION COMPARABLES  - "TRUE" METRICS

MHC

MV

TBV/

MV/

TBV/

Institution / Ticker

Own.

($mn)

MV

Assets

Assets

TFS Financial / TFSL

74%

741

238%

7%

16%

Investors Bancorp / ISBC

57%

589

146%

7%

10%

Capitol Federal / CFFN

70%

541

178%

6%

11%

Beneficial Mutual / BNCL

56%

323

164%

7%

11%

Northfield Bancorp / NFBK

56%

216

178%

10%

17%

Kearny Financial / KRNY

75%

152

266%

7%

18%

Rockville Financial / RCKB

55%

102

157%

6%

10%

Meridian Interstate  / EBSB

58%

99

196%

6%

11%

Clifton Savings / CSBK

64%

80

219%

7%

16%

Waterstone / WSBF

74%

33

531%

2%

9%

Roma Financial / ROMA

73%

88

247%

5%

15%

Catalyst

- Continued share repurchases at less than fair value
- Potential second-step conversion and sale of MHC-owned shares
- Rebound in banking industry fundamentals and/or sentiment
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    Description

    Thrift conversion: Robbinsville, New Jersey-based Roma Financial is the parent of Roma Bank, a federally-chartered stock savings bank founded in 1920 with $1.5 billion in deposits. The parent company is 73%-owned by an MHC, implying that the economics attributable to non-MHC shareholders are more attractive than they initially appear. When adjusting for the MHC ownership and the post-Q2 acquisition of roughly $370 million in assets from troubled Sterling Bank, Roma trades at a market value to total asset ratio of 4% ("true" market value of $77 million divided by total assets of $1.8 billion). We find this valuation attractive for a well-capitalized, well-managed bank in New Jersey. Tangible book value is $214 million.
     
    Roma has remained profitable throughout the crisis and is not subject to a regulatory order. The bank pays a quarterly dividend of $0.08 per share for a dividend yield of 3.3%. It has also been buying back stock at prices well below estimated fair value. We view the investment case as compelling.

    INVESTMENT HIGHLIGHTS

    • 73% of common stock held by Roma Financial Corp., MHC. The economics of these shares belong entirely to the holders of the other 27% of Roma stock, creating a situation in which "true" intrinsic value may be higher than "apparent" value.
    • Second-step conversion may unlock value. Roma will likely wait with a conversion until it can sell the MHC shares at a price exceeding the recent price.
    • Acquired Sterling Bank for $15 million in July. Sterling had deposits of $331 million, loans of $287 million, and tangible book of $16 million. The deal expands Roma's network from 14 to 24 branches in Mercer, Burlington, Camden and Ocean Counties. The integration has been "successfully achieved." 
    • Post-merger capital "strong," as confirmed by continued dividend payments at rate of $0.08 per share per quarter, implying a 3% annualized yield.
    • New buyback suggests management is aware of and not satisfied with undervaluation. Roma authorized the "very attractive" repurchase of 5% of the non-MHC shares in September. The company had purchased 170K shares at $12 per share in Q2.
    • "True" market value of $77 million, implying MV to assets ratio of less than 4%. If Roma earns a 1% spread on assets, it will trade at 4x earnings.

    INVESTMENT RISKS & CONCERNS

    • Continued declines in real estate prices would strain Roma's balance sheet, potentially forcing the company to pursue a second-step conversion at an unfavorable exchange ratio, resulting in dilution.
    • Relatively low insider ownership.

     

    SELECTED OPERATING DATA

    FYE December 31

    2006

    2007

    2008

    2009

    1H10

    Total assets ($mn)

    876

    907

    1,077

    1,312

    1,457

       Change (y-y)

    10%

    4%

    19%

    22%

    17%

    Selected items as % of assets:

     

     

     

     

    Cash equivalents

    7%

    11%

    7%

    4%

    10%

    Investment securities

    22%

    16%

    8%

    26%

    22%

    Mortgage-backed securities

    17%

    16%

    28%

    19%

    19%

    Loans, net

    48%

    51%

    48%

    45%

    42%

    Real estate owned

    0%

    0%

    0%

    0%

    0%

    Other assets

    6%

    7%

    7%

    7%

    6%

    Deposits: Noninterest bearing

    3%

    3%

    3%

    2%

    3%

    Deposits: Interest checking

    11%

    11%

    9%

    10%

    9%

    Deposits: Savings and club

    21%

    19%

    19%

    21%

    22%

    Deposits: CDs

    36%

    39%

    40%

    44%

    43%

    Other liabilities

    2%

    4%

    9%

    6%

    9%

    Total liabilities

    73%

    76%

    80%

    84%

    85%

    Common equity

    27%

    24%

    20%

    16%

    15%

    Selected income statement data ($mn):

     

     

     

    Interest income

    41

    46

    48

    55

    30

    Interest expense

    (15)

    (18)

    (20)

    (22)

    (10)

    Loan loss provision

    (0)

    (1)

    (1)

    (3)

    (2)

    Non-interest income

    4

    4

    4

    3

    3

    Non-interest expense

    (21)

    (20)

    (25)

    (29)

    (16)

    Pretax income

    8

    11

    7

    4

    5

    Pretax pre-provision income

    8

    12

    8

    7

    7

    Selected performance ratios:

     

     

     

     

     

    Return on average assets

    .6%

    .8%

    .5%

    .2%

    .4%

    Return on average equity

    2.9%

    3.1%

    2.2%

    1.2%

    1.4%

    Net interest margin

    3.3%

    3.4%

    3.2%

    2.9%

    3.3%

    Efficiency ratio 1

    72.8%

    63.4%

    79.0%

    89.6%

    70.9%

    Breakdown of loan portfolio (period end):

     

     

     

    Conventional 1-4 family

    48%

    47%

    44%

    42%

    42%

    Commercial and multi-family

    15%

    17%

    24%

    29%

    29%

    Construction

    6%

    8%

    5%

    4%

    4%

    Home equity

    30%

    28%

    25%

    22%

    22%

    Consumer loans

    0%

    0%

    0%

    0%

    0%

    Business loans

    1%

    1%

    1%

    2%

    3%

    Selected troubled loan statistics (period end):

     

     

     

    Non-performing loans / loans

    .1%

    1.5%

    2.0%

    2.5%

    3.3%

    Non-performing loans / assets

    .0%

    .8%

    1.0%

    1.1%

    1.4%

    Non-perform. assets / assets

    .0%

    .8%

    1.0%

    1.3%

    1.6%

    Loan loss allowance / loans

    .3%

    .3%

    .4%

    .9%

    1.2%

    Allowance / troubled loans

    322%

    23.3%

    21.4%

    35.4%

    35.8%

    change in shares out

    21%

    16%

    -3

    0%

    0%

    1 Efficiency ratio is calculated as non-interest expenses divided by the sum of net interest income and non-interest income.

     
    THRIFT CONVERSION COMPARABLES  - "TRUE" METRICS

    MHC

    MV

    TBV/

    MV/

    TBV/

    Institution / Ticker

    Own.

    ($mn)

    MV

    Assets

    Assets

    TFS Financial / TFSL

    74%

    741

    238%

    7%

    16%

    Investors Bancorp / ISBC

    57%

    589

    146%

    7%

    10%

    Capitol Federal / CFFN

    70%

    541

    178%

    6%

    11%

    Beneficial Mutual / BNCL

    56%

    323

    164%

    7%

    11%

    Northfield Bancorp / NFBK

    56%

    216

    178%

    10%

    17%

    Kearny Financial / KRNY

    75%

    152

    266%

    7%

    18%

    Rockville Financial / RCKB

    55%

    102

    157%

    6%

    10%

    Meridian Interstate  / EBSB

    58%

    99

    196%

    6%

    11%

    Clifton Savings / CSBK

    64%

    80

    219%

    7%

    16%

    Waterstone / WSBF

    74%

    33

    531%

    2%

    9%

    Roma Financial / ROMA

    73%

    88

    247%

    5%

    15%

    Catalyst

    - Continued share repurchases at less than fair value
    - Potential second-step conversion and sale of MHC-owned shares
    - Rebound in banking industry fundamentals and/or sentiment
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