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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